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Real Wage Unemployment

Real wage unemployment is a situation in which wages are set above the equilibrium level, resulting in an excess supply of labor or unemployment. It occurs when the minimum wage or other forms of wage regulation, such as collective bargaining agreements, cause wages to be higher than what would be determined by the market forces of supply and demand.

When wages are set above the equilibrium level, employers are less willing to hire workers, while workers are more willing to supply their labor. This creates a surplus of labor or unemployment, as the number of workers looking for jobs exceeds the number of available job openings.

Real wage unemployment can also be caused by factors such as technological change or changes in the structure of the economy. For example, if a new technology reduces the demand for a particular type of labor, such as manufacturing jobs, workers may face unemployment as they try to find new jobs in other sectors of the economy.

Real wage unemployment can have both short-term and long-term effects. In the short term, it can lead to a reduction in employment and output, as firms are less willing to hire workers at higher wages. In the long term, it can lead to a reduction in the competitiveness of an economy, as higher wages can make it more expensive for firms to produce goods and services, leading to lower productivity and economic growth.

Policymakers often debate the appropriate level of wages and other forms of labor market regulation, as they seek to balance the interests of workers and employers. While higher wages can increase the standard of living for workers, they can also lead to real wage unemployment and other unintended consequences.

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