Classical view on unemployment, Managerial Economics

Assignment Help:

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'.  


Related Discussions:- Classical view on unemployment

The spendthrift economy, The Spendthrift Economy This assumes a circul...

The Spendthrift Economy This assumes a circular flow of income in a closed economy with no Government sector and no foreign trade.   It also assumes the existence of two sect

Define the analysis of mathematical functions, Time domain: Time domain is...

Time domain: Time domain is a term which is used to define the analysis of mathematical functions or physical signals, with respect to time. In the time domain, signal or function

What is difference between monopoly and perfect competition, What is the di...

What is the difference between monopoly and perfect competition? Monopoly versus Perfect Competition: 1. Perfect competition is equal to monopoly competition, at the perfe

BREAK EVEN ANALYSIS, WRITE A NOTE ON BREAK -EVEN ANALYSIS IN PROFIT MANAGEM...

WRITE A NOTE ON BREAK -EVEN ANALYSIS IN PROFIT MANAGEMENT

Explain cost output relationship, Explain cost output relationship with ref...

Explain cost output relationship with reference to: a.    Total fixed cost and output b.    Total variable cost  and output

Basis of wage claims, The Basis of Wage Claims The union's demand for ...

The Basis of Wage Claims The union's demand for higher wages is normally based  on one or more of the following four arguments: 1. The cost of living argument This is

Wage determination, WAGE DETERMINATION, POLICY AND THEORIES Wages and ...

WAGE DETERMINATION, POLICY AND THEORIES Wages and salaries are rewards to labour as a factor of production of goods and services.  In ordinary speech a distinction is frequent

Slope of the demand curve and price elasticity, The elasticity of a demand ...

The elasticity of a demand curve is frequently judged by its appearance: the flatter the demand curve, the greater the elasticity and vice versa. However this conclusion is mislead

Write Your Message!

Captcha
Free Assignment Quote

Assured A++ Grade

Get guaranteed satisfaction & time on delivery in every assignment order you paid with us! We ensure premium quality solution document along with free turntin report!

All rights reserved! Copyrights ©2019-2020 ExpertsMind IT Educational Pvt Ltd