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
Factors influencing demand for a product These are broadly divided into factors determining household demand and factors affecting market demand . Factors affecting hou


Assume a floating exchange rate system. The Fed pursues an expansionary monetary policy. Draw how this would look on the graphs below. Mark the new equilibriums. Complete the table

how sample size technique is helpful in demand forecasting of a particular product?

"Inflation is not possible under the gold standard." Is this declaration true, false, or uncertain? Describe your answer

Explain about Pragmatic Managerial economics is pragmatic. In pure micro-economic theory, analysis is performed based on certain exceptions that are far from reality. Though in

Average Propensity to save The Average Propensity to Save [APS] is defined as the fraction of aggregate national income which is devoted to savings.  Thus if S denotes savin

Movements along the supply curve Movements along the supply curve are brought about by changes in the price of the commodity. When price increases from P1 to P2, quant

electron control,inc.,cells voltage regulators to other manufacturers , who then customize and distribute the products to quality assurance labs for their sensitive test equipment.

Calculate point elasticity of demand for demand function Q=10-2p for decrease in price from Rs 3 to Rs 2