One possible explanation for higher natural
rates of unemployment in Western Europe than
the United States is stronger labor unions (see
Chapter 8). Strong labor unions may also increase
the severity of a business cycle by increasing wage
stickiness. Draw a graph of the aggregate labor
market in equilibrium. Then assume that the
demand for labor decreases due to an economic
downturn and that nominal wages and prices
are sticky in the short run. Show the effect on
the quantity of labor employed and the quantity
unemployed.