Answer to Question #286670 in Macroeconomics for Vansh

Question

We termed the classical view of the labor market an auction market. What assumptions underlie this characterization ?

Answer 1

The classical view of the labor market assumes that wages are sufficiently flexible so that the labor market is always in equilibrium. It is termed as an auction market because there is always bidding for labor services to employers and an equilibrium matching function as well as an equilibrium wage dispersion among homogenous workers.

Assumptions that underlie this characterization include:

• Overproduction - It assumes overproduction to be the general condition of the economy, thus propagating the belief of non-existence of unemployment.
• Constant returns to scale.
• Flexibility of prices and wage - As the theory assumes overproduction to be the general condition of the economy, the prices of the products decreases due to overproduction thus raising the demand and consumption expenditure resulting in increased employment opportunities. Similarly it believes in cutting down the wage of labor to enhance the demand for labor and reduce unemployment.