Association of Chartered Certified Accountants (ACCA) Certification Practice Test

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What factor typically causes real wage unemployment?

Exccess labor supply at a given wage
High demand for labor
Inflation of living costs
Government subsidies

The correct answer is: Exccess labor supply at a given wage

Real wage unemployment occurs when the wage rate for labor exceeds the market equilibrium wage, leading to a situation where the quantity of labor supplied is greater than the quantity of labor demanded. This typically happens when there is an excess supply of labor at a given wage. When wages are set above the equilibrium level, employers may not hire as many workers as they would at a lower wage, resulting in higher unemployment among those seeking jobs. This situation can arise due to minimum wage laws, union pressures, or other regulations that set a wage floor above the natural market rate, causing some workers to be unable to find employment despite being willing to work at lower wages. In contrast, high demand for labor often leads to increased employment opportunities, inflation of living costs does not directly influence the labor market equilibrium, and government subsidies may encourage hiring rather than contribute to unemployment. All these factors help to highlight why an excess of labor supply at a given wage is the main contributor to real wage unemployment.