Classical view on unemployment, Managerial Economics

CLASSICAL VIEW ON UNEMPLOYMENT

The classical economists as we observed in Unit 1 of this course, were of the view that full employment prevailed  in  the  economy  all the time. This was consistent with the view that whatever amount of labour was supplied  got demanded  by  firms. A  basic  assumption  in  the classical framework was  the flexibility in wage rate and prices. Thus the gap between supply of and demand for labour got wiped out through adjustments in wage rate. 

304_classical view of unemployment.png

Fig. : Equilibrium  Level of Employment 

In Fig.  we measure real wage  rate (w) on y-axis and quantity of labour (L) on x-axis. The equilibrium wage rate  reached  through interaction of supply of  labour (L,)  and demand for labour (Ld)  is W*  and quantity of labour employed is L*, which represents full employment. 

The  aggregate  supply curve according to classical economists is a vertical straight line at the full employment output level. At  the equilibrium wage rate everyone seeking employment gets engaged. If  the wage rate  is above w (see Fig.) there is excess supply of labour compared to  its demand.  In  their efforts to get  employed  some  of  the currently unemployed workers will be willing to work at a wage lower than the prevailing one and in the process will bring down the wage rate till it reaches w*. On the other hand, when wage rate  is below w* there will  be  excess demand compared to supply. Due to shortage of labour firms will compete with each other and will be willing to pay higher wage, as a result of which wage rate will increase. Remember that classical economists were concerned with real wage  in the economy, which  is W defined as the  ratio of nominal wage (W)  to price  level (P)  such that  w =  -. P Thus flexibility in real wage assured that a rise in price level is accompanied by a proportionate rise in nominal wage.  In  fact  the dichotomy between real  and monetary sectors of the economy, as envisaged in classical model, ensures such proportional changes. The classical economists did not rule out the possibility of decrease in nominal  wage  rate. Nonetheless, it  was  always  in  response  to decrease in money supply and price level. In  theory, the classical model  appears to have a  sound  base. When  compared with  reality, however, it does  not  explain the obvious  phenomenon  of unemployment in the economy. As we will see below, there is much rigidity  in the economy, which does not allow smooth and instantaneous changes in wage rate. Moreover, some amount of frictional unemployment  is always present  in an  economy as workers switch over from one job  to another. The neoclassical economists recognized the limitations of classical model and made amendments to the classical position of zero unemployment. They assumed that the economy in normal times  has  certain minimum  unemployment  called 'natural rate of unemployment'.  

Posted Date: 10/26/2012 6:06:21 AM | Location : United States







Related Discussions:- Classical view on unemployment, Assignment Help, Ask Question on Classical view on unemployment, Get Answer, Expert's Help, Classical view on unemployment Discussions

Write discussion on Classical view on unemployment
Your posts are moderated
Related Questions
Real economies are delineated as those which are associated with a reduction in the physical quantity of inputs like raw materials, varying kinds of labour and various kinds of cap

PRINCIPLES OF AN OPTIMAL TAX  SYSTEM When taxes are imposed certain conditions must be fulfilled.  These conditions are known as Principles or canons of taxation. According to

Traditional theoretical concepts to actual business behaviour Accommodating traditional theoretical concepts to actual business behaviour and conditions: Managerial economic

Q. Example on Changes in fixed costs and profit maximisation? What if arena owner in the illustration above triples the fee for the subsequent concert but all other factors are

Determine The scope of managerial economics The scope of managerial economics involves following subjects: 1.  Theory of demand 2.  Theory of production 3.  Theory of

The Budget line and its economic interpretation The indifference curve shows us consumer preferences but it does not show us the situation in the market place.  Here the consu

Q. Explain about Time series analysis? An analysis of relationship between variables over a period of time. Time-series analysis is helpful in assessing how an economic or othe

what are the examples of the types of elasticity (price,income & cross elaticity

Commercial Banks A Commercial Bank is a financial institution which undertakes all kinds of ordinary banking business like accepting deposits, advancing loans and is a member

a)  The most well-organized combination of resources which can be used to make a given level of output is that which:   b)  The enactment of a guaranteed yearly income for al