Question

The subjective question is as follows: Which fact or theory about employment and wages confuses economists? 

A. Less than 2 percent of the work force is paid minimum wage but it is still established and discussed by the federal government. 

B. Only roughly 12 percent of the U.S. work force participate in labor unions yet the organizations still have considerable political power in the U.S. 

C. People who are willing to work at equilibrium market wage are not employed. 

D. Productivity of workers will increase if they are paid more so employers will pay more than the market establishes as fair. 

E (and this is my answer of choice). Employees will not request major advances in their salaries when business is going well and employers will not drastically cut employee salaries when business is not doing well. 

F. Economists are mighty and all-knowing. Nothing confuses economists. 

G. Employees are willing to take reductions in their salaries as well as other workers are subject to similar pay cuts. 

Answer 1

The answer should be option C

People who are willing to work at equilibrium market wage are not employed.

Economists are confused on the relationship between unemployment and wage which starts from the Classical theory of employment based on the fact that marginal productivity of labour is equal to wages assuming diminishing marginal productivity.

During Great Depression, A.C.Pigou asserted the policy of general wage cut and that classical theory holds true for a particular firm or industry specific and a general wage cut cannot lessen unemployment.

Now Keynes came into the picture negating what classical theory and A.C.Pigou explained while former assumed wage flexibility and latter supported Say's law and unemployment would disappear if workers accepted low wages.

Keynes believed that wage rate is a double edged weapon which on one hand reduces costs but on other hand lowers the purchasing power of labor.

Next came into the picture was Patkins who gave insight on involuntary unemployment appraising keynes views on the same but refuted from the fact that involuntary unemployment originated from wage rigidity.

His understanding was based on the fact that nominal rigidities worsen involuntary unemployment and assumed a phenomenon which is competitively adjusting to it. The concept of voluntary unemployment was introduced that people voluntarily decide not to work at low wages or choose leisure over working at the going wage.

Hence, involuntariness corresponds to full employment where any worker who is off the supply curve is considered to be involuntarily unemployed.