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3. (5 points) Labor market model - Exogenous vs endogenous markup a. (1 point) Let us first consider the wage- and price-settPlease help with a and b. Thank You

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Answer #1

a)

Real wage PS (Price setting relation) WS (wage-setting relation) Unemployment rate

b)

Real wage А A -PS (Price setting relation) WS WS (wage-setting relation) U V Unemployment rate

Now the employees have more bargaining power as they got freedom to unionize, thus they will demand hike in their wage. Now the WS curve moves to WS’ but the firm does not ant to increase the real income. Here unemployment moves from U to U’ in order to keep the real wage unchanged and a new equilibrium comes in the labor market that is A’

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