Labour Market Equilibrium

demand for labour is a derived demand

In the classical model the real wage rate (and not

nominal)

of

labour

is

determined

by

the

intersection of demand and supply curve of labour.

In the long run the demand and supply of labour is established at the level where the wage rate of labour is equal to both the Marginal Revenue Productivity and

Average Revenue Productivity.

Trade unions can not enhance wages without creating unemployment.

When rise in wages increase efficiency of workers, wages. Can be raised without creating unemployment and inflation.

Classical advocated abolishing minimum wages, unions

and long term contracts to increase labour market

flexibility.

To sum up, according to classical unemployment is

a result of high and rigid real wages.

According to Keynes, it is not real but nominal

wages that are negotiated between employers and

employees.

Secondly nominal wage cuts would be difficult to

put in to effect because of laws and wage contracts.

Thirdly, reduction in nominal wages would lead to

reduction in consumption spending which could

deepen recession. Fourthly, if wages and prices were falling, people would start to expect them fall further triggering spiral downward.

Reduction in wage is a double edged weapon it

results in cost reduction together with reduction in

incomes- consumption expenditure, aggregate

demand, expected profits, investment consumer

goods industry, capital goods industry and the overall level of economic growth and well being of people.

The principal difference between classical and

Keynesian system is the downward inflexibility

of money wages at loss than full employment. It is

this feature of the Keynesian System which leads

to the possibility of an equilibrium at less full employment level.