Labor supply and labor demand in the keynesian model, Macroeconomics

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Supply of labor, LS (W/P), depends positively on real wages in classical model. It isn't always clear which individuals are included in the labor supply. Labor supply may consist of only individuals in the workforce or it may have a wider definition including individuals which are outside the labor force though would like to work if they could find a job. The second category may comprise so-called 'discouraged workers' and individuals which are in school but who would rather work. 

Keynesian labor supply differs from classic labor supply in that it includes individuals which are outside the workforce. Thus for a given real wage, Keynesian labor supply is larger than the classic labor supply. Though Keynesian labour supply is still a positive function of the real wage. 

Demand for labor LD (W/P) is the same as for classical model. It is derived from marginal product of profit maximizing firms. Following graph illustrates the classical labor supply, Keynesian labor supply and labor demand. 

1933_Labor supply and labor demand in the Keynesian model.png

Figure: Classical and Keynesian labor supply

Note that for classical equilibrium real wage, Keynesian supply exceeds the demand. In Keynesian models, we don't presume that real wage will be equal to the equilibrium real wage. The labor market need not be in equilibrium in the classical sense. Though in the Keynesian models, real wage is such that there is always an excess supply of labor (using the Keynesian supply).


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