Definition
- Real-wage unemployment
- Real-wage unemployment, or classical unemployment, arises when real wages are held above the market-clearing level, so more people want work than firms will hire.
Example
Can you think of an example of real-wage unemployment?
A union agreement holds pay in a local labour market above the rate that would clear it. More people want jobs there than firms will hire, until real wages come down.
Test yourself
Can you name five types of unemployment?