Microeconomic Foundations

On the face of it, the cause of unemployment seems clear: too many workers chasing too fewjobs. Yet this simple phenomenon has presented a tremendous puzzle for economists for 60 years. Experience shows that prices rise or fall to clear competitive markets. At the market-clearing price, buyers willingly buy what sellers willingly sell, But something is gumming up the workings of the labor market when many hospitals are searching for nurses but cannot find them while thousands of coal miners want. to work at the going wage but cannot find ajob. Similar symptoms of labor market failures’ are found in all market economies.

Economists look to the microeconomics of labor . markets to help understand the existence of unemployment, Although no universally accepted theory has emerged, many analysts believe that unemployment arises because wages are not flexible enough to clear markets. below why wages are inflexible and why inflexible wages lead to involuntary . unemployment.