Let’s think about a perfectly competitive labour market with an upward sloping supply curve, a downward sloping demand curve and where wages and prices are completely flexible.
(a) Imagine that the real wage is above its equilibrium level. In this case will there be: an excess supply of labour or an excess demand for labour? What do you predict would be happening to the real wage as a result?
(b) Imagine that the real wage is below its equilibrium level. In this case will there be: an excess supply of labour or an excess demand for labour? What do you predict would be happening to the real wage as a result?