Answer to Question #89499 in Macroeconomics for Sung Eun Seok

Question

Classical economists believe that if the economy is left on its own, without any intervention such as in a. above, there will be automatic adjustments towards full employment equilibrium. Explain.

Answer 1

Classical economists allow frictional temporary unemployment caused by the time spent searching for a job by people looking for a job, both those who change jobs and begin to work for the first time.

The classics believe that involuntary unemployment in the long period is impossible, because there is competition in the labor market and the elasticity of wages.

If the economy lacks funds to purchase all industrial products, then the mechanisms of market regulation automatically turn on — prices and wages change. The economy with their help is brought to equilibrium without reducing the level of employment, production and real income.

The labor market in conditions of perfect competition has the following features: a large number of firms competing in the market in hiring workers of this type of labor; the presence of many workers of the same qualifications, offering their work;

From the point of view of the classical theory, unemployment is a specific economic phenomenon that arises as a result of wage increases. In conditions when wages reach a high level, there is an excess of supply in the labor market.

Classical analysis shows that unemployment arises as a result of the constant aspirations of the employed workers themselves to increase their wages.

Thus, the classical model justifies a reduction in wages. But practice shows that wages, as a rule, do not decrease during periods of decline in production. This is opposed by hired workers, who have created their own organizations (trade unions) to protect their interests.

Trade unions and collective agreements stabilize the wage level and do not allow it to fluctuate up and down depending on the situation on the labor market. But stable wages in the classical model means the existence of unemployment. At the same time, according to the classics, unemployment is truly voluntary. Employees do not agree with lower wages, and as a result, give preference to unemployment