What is the relationship between unemployment and wages? A simple model of supply and demand in a competitive labor market-and some not so simple models built on the same foundation-suggest a positive relationship: Higher wages reduce the demand for labor and lead to higher unemployment. However, there is massive empirical evidence for a negative relationship: all else being equal, higher unemployment is associated with lower wages, not higher. This pathbreaking study discusses the components of the negatively sloped “wage curve”, other empirical research, and the implications of the findings for theories about the labor market.
