But there is an important difference between real wages that can be easily reduced by purely nominal means, and excessive real wages that are independent of nominal factors. Make sure you understand the difference between compensating differentials and efficiency wages. Outsiders are perfect competitors for jobs. Insiders have some market power. Imperfect monitoring of harassment.
Firms unilaterally determine employment.
Ex ante, workers would pre-commit to competitive conditions, but ex post workers have the upper hand. While real rigidity theories have been generally designed to help understand unemployment in less regulated economies, labor market regulation can make the problem a lot worse - and this is probably what has happened in Europe. High legal minimum wages. High unionization rates with strong legal support for unions. Arguments Against the Obvious Explanation Most of the interventions existed for at least a decade before they had any observable impact.