Consider the information in the file named Labor Market Graph. Suppose that in t

Question

Consider the information in the file named Labor Market Graph. Suppose that in this country there are no minimum wage laws, no efficiency wages, and no labor contracts so that wages and prices are fully flexible. In that case, the overall unemployment rate in the long run equals ____ percent.

ZOOM+ 6.00 DL 5.75 5.50 5.25 5 00 475 1.50 4.00 3.75 Labor (L) The graph above shows the labor market graph of a country. In this country, the supply of labor does not depend on real wage. This is because; the substitution effect of real wage changes equals the income effect. This means that the supply- of labor function is vertical as shown above. This is not a very realistic assumption, but it wl simplify our calculations. Some other pieces of information about the country: Frictional unemployment as a percentage of labor force : 296 Structural unemployment as a percentage of labor force : 3%. Okun's alpha 2 Potential GDP 100,000

Explanation / Answer

Overall unemployment rate in the long run = Frictional unemployment + structural unemployment

Overall unemployment rate in the long run = 2% + 3%

Overall unemployment rate in the long run = 5%

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