“Classical view recognizes unemployment where unemployment is caused by excess supply triggered by high price level of labor. Classical economist believed that full employment can be achieved if forces of demand and supply were left to adjust on their own in order to reach an equilibrium wage.
Classical Economists and the Keynesian Economists. Classical economists postulates that the market, on its own, will be able to adjust while Keynesian economists believe that the government must step in to solve problems. The two camps have differing ideas on the causes and solutions of unemployment. The Classical economists believe that unemployment is caused by excess supply, which is caused by the high price level of labor. Based on supply and demand, when wages are high due to social and political forces, demand would be low and supply would be high; that excess supply represents unemployed people.
(b) Unemployment if wages are sticky downward?
Unemployment will rise because prices are unresponsive to changes in demand, which has an effect on firms especially during recessions many of them will lay off workers while other employers will be reluctant to hire even if the situation in the economy improves. Thus, it could result to slow growth during recovery
(c) Reasons for sticky download
According to Keynesian theories he suggest four possible reasons for wages stick downwards.
Keynes argued that workers would resist any attempt to cut their wages and this would result to wages not falling enough to clear unemployment.
The market for loanable funds (money market)
He argued that people would spend less if savings increases leading to a decrease in aggregate demand. As a result firms will inclined to invest because of low demand for their products
2. Unemployment Data.
Period with highest unemployment rate
The highest unemployment rate is between 1978 and 1984
This period had the highest unemployment rates in the USA following the change in monetary policy by the US treasury inclined towards a more contractionary position in an attempt to curb inflation. As a result, there was a recession due to the mopping up of funds from the public to lower the amount of money in circulation. Inflation was coupled with high interest rates and reduced ability of organizations to finance their production thus low employment…”
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