Similarly, there is structural unemployment, when people find their skills are not employable because they have become technologically redundant or there is no demand for them in certain regions of the country where they live. By comparison, there is an enduring controversy associated with the attempts to unravel what, if any, are the differences between classical and Keynesian unemployment.The classical economists believed in the Say’s Law of Markets and in wage-price flexibility.
Similarly, there is structural unemployment, when people find their skills are not employable because they have become technologically redundant or there is no demand for them in certain regions of the country where they live. By comparison, there is an enduring controversy associated with the attempts to unravel what, if any, are the differences between classical and Keynesian unemployment.The classical economists believed in the Say’s Law of Markets and in wage-price flexibility.According to Keynes, the equality of the real wage to the marginal disutility of employment corresponds to the absence of ‘involuntary’ unemployment.
The above definition of involuntary unemployment based on the labour supply curve was used by the ‘classical’ economists. According to Keynes, however, classical theories (such as Pigou’s) did not admit the possibility of involuntary unemployment by union wage differentials or minimum wage legislation. The Natural Rate of Unemployment (NRU): There are two conceptually’ separate reasons why the real wage may fail to adjust to the competitive equilibrium value.
Firstly, the institutions of the economy may not correspond to those of a competitive economy: information may be costly, there may be traces of monopoly, etc.
It takes into account the actual structural characteristics of the labour and commodity markets, including market imperfections, search and mobility costs.
In simple terms, it may be regarded as that level of unemployment which nonetheless remains at full employment.
He introduced the concept of involuntary unemployment that had something to do with inadequate demand in final commodity markets and which could be remedied with the management of demand by fiscal policy and possibly by monetary policy too.
In explaining the cause of unemployment, Keynes focuses on the role of nominal wage inflexibility.And such unemployment would disappear quickly due to fall in real wage.The intuition behind the classicists’ analysis of unemployment comes from the standard apparatus of supply and demand curves.Clearly, Keynes wanted to focus on a particular type of involuntary unemployment.Don Patinkin also used the static labour supply definition in his well-known analysis of involuntary unemployment: The norm of reference to be used in defining involuntary unemployment is the supply curve for labour as long as workers are ‘on their labour supply curve’—that is, as long as they succeed in selling all the labour they want to at the prevailing real wage rate—a state of full employment will be said to exist in the economy. Pigou proposed measuring involuntary unemployment of a group of persons by the number of hours that these persons would have been willing to provide at the current rate of wages under current conditions of employment.However, it is important to note that Keynes also excluded unemployment “due to the refusal or inability of a unit of labour, as a result of legislation or social practices or of a combination for collective bargaining or of a slow response to change or of mere human obstinacy, to accept a reward corresponding to the value of the product attributable to its marginal productivity”.Thus, Keynes chose to exclude union wage differentials as well as minimum wage legislation as sources of involuntary unemployment.Consequently, if the supply of labour exceeds the demand and there is a problem of unemployment, then the solution lies with a fall in the real wage as this will increase the quantity of labour demanded and close the unemployment gap.In his General Theory Keynes disputed the classical analysis of unemployment and the associated policy prescriptions.Unemployment can be divided into different types according to the reasons for its occurrence.For example, there is frictional unemployment, which arises when a person is temporarily unemployed while moving between jobs.