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    General Equilibrium in the labour market

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    Data relating to the labour market in a small economy is provided below, where the workforce is shown in thousands:

    See attached

    i) If the real wage is 9 euros per hour, determine the levels of employments and voluntary and involuntary unemployment
    ii) assuming that the real wage is flexible, what are the equilibrium wage rate, the level of employment and the unemployment level?
    iii) Now suppose that as a result of government measures to increase labour participation, the number of workers willing to work (AS) at the real wage rate of 7 euros has increased to 210,000 and that this increase, in percentage terms applies uniformly to the number of workers willing to work, at all other wage rates. Write down the labour supply with the increased participation.
    iv) Now assume also that due to cost economies, firms are recruiting an extra 51000 workers at each wage rate. Determine the equilibrium rate with the increased participation and increase recruitment.

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    Solution Preview

    i) When the real wage is ₤9 per hour, the labour force is 306, labour supply is 240 and labour demand 160.

    Voluntary unemployment happens when those who are able to work choose not to participate in the labour market, or not to supply their labour, at the equilibrium wage.
    In this case, the level of voluntary unemployment is the difference between the labour force and ...

    Solution Summary

    The solution provides definition of voluntary and involuntary unemployment as well as detailed explanation of how the equilibrium wage and employment are identified in a labour market.