Final answer:
Involuntary unemployment would not exist in a labor market with perfectly flexible wages because wages would adjust to ensure that the quantity of labor demanded equals the quantity supplied at the equilibrium wage, eliminating the unemployment gap that results from wage stickiness.
Step-by-step explanation:
If labor markets had perfectly flexible wages, as the market-clearing theories suggest, involuntary unemployment would not exist. The concept behind this assertion is that in a perfectly flexible labor market, wages would adjust to ensure that the quantity of labor demanded always equals the quantity supplied, leading to an equilibrium state with no involuntary unemployment.
Cyclical unemployment, which rises and falls with the business cycle, is attributed to the inability of wages to adjust quickly, especially downwards due to wage rigidity caused by various factors such as implicit contracts, efficiency wage theory, and others.
For example, as shown in Figure 8.7 (b), when there is a downturn in the economy, and the labor demand curve shifts left, the quantity of labor demanded decreases at the initial wage level. However, with perfectly flexible wages, the wage would decrease to balance the quantity of labor supplied with the quantity demanded, thus eliminating the unemployment that would otherwise result from wage stickiness.