In an economy, ?rms set prices at a markup of 20% over costs. Costs are all in the form of wages, so that P = (1.2) W. Labor unions enter into bargains with ?rms on wages. The higher is unemployment, the less powerful are unions and the lower is the real wage they can achieve in negotiations. The real wage that gets negotiated is:
W/P = 1 - 2u
where u is the fraction of the workforce unemployed. What is the equilibrium fraction of the labor force unemployed?