Question

The period from 2007 to 2009 was a time of economic contraction that came to be known as the​ "Great Recession." During periods of​ recession, most firms experience a decline in demand for their​ product, as well as a decline in the​ product's equilibrium price. All other things being​ equal, macroeconomic theory predicts that the wage of most workers should decline in recessionary periods.​ However, this was not the case in the Great​ Recession, or during many other economic downturns throughout recent history.Based on the discussion in the​ chapter, explain why this might be​ so, and what the implications are for unemployment.?

Answer 1

Answer:

During downturns workers are resistant to the lowering of wages and firms try to avoid doing so. This downward wage rigidity keeps the quantity of labor supplied greater than demand, causing unemployment.