The Classical Theory of Employment. The assumption of full employment in Classical Economics followed from what Keynes described as the Classical theory of employment in his general theory. Now, in Classical Economics, the level of employment at any given time is determined by the twin forces of demand and supply of labour. Let us first examine what would determine the demand for labour. In Classical Economics, demand for labour depends upon two variables: Marginal product of Labour and real wages. As long as marginal product of labour is greater than real wages, demand for labour would be forthcoming on the labour market, but it would cease when marginal product of labour = real wages. On the supply side of labour, two of the variables that would determine the supply of labour are: utility of real wages and disutility from amount of work. These both variables are subjective and hence cannot be measured quantitatively. However, if utility of real wages from a given amount of work was greater than disutility from work, workers would be able and willing to work, hence supply of labour would be forthcoming on the labour market; and the supply of labour would stop when utility of real wages = disutility from work. From the above analysis of demand and supply of labour, the Classical and Neoclassical economists were able to derive both the equilibrium levels of employment and of wages in a competitive economy. Now classical economists argued that the equilibrium level of employment would also imply the full employment level of the economy. It is important to remember, however, that the classical concept of full employment is consistent with a certain level of: 1) Frictional 2)Seasonal 3) Cyclical 4) Voluntary unemployment. However, the classical economists argued that the most important reason of unemployment is voluntary unemployment, i.e, the unwillingness of workers to accept cuts in wages. Flexible wages would lead to full employment in equilibrium in the labour market. If we accept the Classical and Neo-classical theory of employment, there could only be limited measures available for increasing the level of employment. First, a proper competitive economic environment could reduce the level of frictional unemployment. Second, improvements in labour productivity through technological change could bring about an increasing demand for labour on the labour market if real wages, it should be possible to reduce the level of voluntary unemployment. In a situation of large scale unemployment that was common in the post-Napolenic war in Britain, the Classical Economists tried to explain away the situation in terms of adjustments in the economy from war to peace; and they expressed the view that such unemployment was due to a temporary deviation of the economy from economic equilibrium. Furthermore, they argued that in the long run, such deviations would disappear and equilibrium would be restored with full employment in the economy. This made Keynes laugh and comment --- In long run, we are all dead.
Posted on: Sun, 26 Jan 2014 14:01:05 +0000
Trending Topics
Recently Viewed Topics
© 2015