Theories of Employment

Theories of Employm
Concept & Meaning:
General
condition
in whichresources
arewilling
an
to produce
goodsandservices butarenoteng
productive activities
.
Theanalysis
of unemployment,emergedfromthe
Depression 1930’s
.
The most commonmeasureof unemployme
unemployment rate
Types of Unemployment
 Types of Unemploym
Cyclical unemployment
unemploymentis higherduringrecessions
andlowe
periods of prosperity oreconomic
high growth
Frictional unemployment
It takes workers some time to move from
another
Seasonal unemployment
unemployment occurs when demand for
workers varies widely over the course of
Structural unemployment
Classical Theory of Employment

Due to change in the structure of the

organization structural unemploymen
 Classical Theory of Emplo
ThisTheorywasdeveloped
bythecombined
con
of classical economists as:
Adam Smith, J.S. Mill, A.C Pigou, Da

Thistheorystatesthatthereis alwaysfullempl
in a free capitalist economy in the . lo

The classicaleconomiststook full employm

granted
andbelievedin anautomaticadjustme
economy
Classical theory is based on follow
as

* There is always full employme

* Economy is always in the stat
* Money does not matter
There is always full employment :
-Laborandcapitalof a countryarealwaysfullyemploy
long run.
-Fullemployment doesnotmeanthatalltheresource
employed.
-There mightfrictional
be and voluntary unemi
state of full employment.

Economy is always in the state of :equ

-Thereis nogeneral
overproduction
andunderprod
a period of production.
-Theaggregatedemandis always
equaltoaggregate
sup
long run and the economy remains
stable in
equilibri
 Money does not matter:
-The classical economistsmoney
treated only as a
exchange.
-The role of money is facilitate
only to the transact.
-Itdoesnotplayanysignificant
roleindetermining
the
and employment.

Thereis neitherunderproduction
noroverprodu
entiremarketsystemworksautomatically
Say's law of market
andit main
economy in equilibrium.
 Say's law of marke
Say's law,French
a economist Jeane Baptist
A classical
economist,
statingtheideathattheprodu
aggregateoutput
createssufficient
aggregatedema
production.

In simpleway,say'slaw statesthat"supplycreates
demand" andthereis nooverproduction.
Demandor
for buyinggoodsandservices is automatically
comin
process of production.

Oneneednot worryaboutdemand, demandmatch

Say's law is based on the following

supplyautomatically
becausewhileproducing,
we
workers, workers have no motive for saving
Say's law is based on th
Assumptions
:
Free market economy
No government intervention
Expandable market size
Capability of the economy
Flexibility in internal prices
Role of money as medium
only " of ex
No leakages in money use
Long run time for equilibrium (In
 Supply equals Demand

Here,

Quantity Theory of Money

 Quantity Theory of Mo
The relationship in which
price is made a func
money supplyis known as quantity theory o

Symbolically,
MV = PY ………………….
Where
,
M = Money Supplyor, total amount of mon
V = velocity or, number of times used p
purchase final
of goods
Y = Total output produced in that perio
P = General Price level
MV = PYis set under the assumption Y and
thatV
constantor stable in the short. Inrun
the class
the level of output is stable in the short r
PL= f (Ms)…………..(i)

With V and Y stable

, the price level is directly
money supply.
Higher the money supply h
the price level.

Ms PL and Vice versa

 Graphically,

Example,
Example,
The classical theory of employmentcriticized
has bee
J.M K

According to Keynes, Classical theory was p

butdifficulty
withthistheory
isthatit isin
of solving the actual economic p
misleading
.
 It can be criticized on the following groun
Under-employment equilibrium
Repudiation of Say's law
Government intervention
Long-run analysis
Static analysis
Not a general theory
Assumption of perfect compe
Equilibrium level of Output and Employment
Not practical
 Equilibrium level of Output and
Equilibrium level of Employment
The following relationships have been derive
Aggregate Production Function:
Y = F (L, K)……
Ld= F (W/P)……….. (
Labor Demand Function:
Labor Supply Function: Ls = g (W/P) ……

Therelationship
betweenequation(ii) and(iii) giv
equilibrium condition of labor market whe
labor demand equals labor sup Ld=
Graphically,
Equilibrium level of Employment and O
Graphically,
 Conclusion
Though the classical theory is perfectly l

-It cannot
beapplied
tosolvetheactualproblem
world.

-Theclassical theoryof employment

is no longe
accepted eitherby the publicor by academ
Principle ofbusiness
Effective Demand economists
 Principle of Effective De
Concept
Thebasicideaof Keynesian theoryof employm
principle of effective demand.

According to Keynes,
In the shortrun,thelevelof employment
depend
effective demand
.
Thegreatertheaggregate effective
demand,
greaterwi
level of employment and vice-versa.

Thus,unemploymentresultsfroma deficiency
of e
demandand the levelof employment can be rai
increasing the level of effective demand.
Theterm“Effective
Demand
” to bedenoted
thetotalde
goods and services at various levels of emp

Therecanbea levelof employmentwhereaggregatd

equals aggregate supply.
This is the point
effective
of

Thus, accordingto Keynes,the level of emplo

determined
byeffective
demand whichin turn,is det
bythe
Aggregate demandand price
Aggregate supply. price
Aggregate demand Price:
Theaggregatedemandpriceis theamount
ofmone
the Entrepreneurs
expectto get by sellingthe
produced by the number of men employ

In otherwords,It refersto theexpected

revenue
fr
sell of output produced at a particular lev

The followingtableshowsthe aggregate

dema
function or, schedule
The following table shows the aggregate
function or, schedule
Aggregate Demand schedu
Level of Employment Aggregate Dema

100 200
200 600
300 900
400 1100
500 1200
Aggregate supply: price
At any given level of employment of labor, a
is the total amount of money which all the en
economy taken together,
must expect to receive
of the outputproduced by the given level empl
be just worth employing them.

The aggregate supply price refers

proceeds
to the ne
from the sale of outpu
t at a particular level of em
Aggregate supply prices for different leve
are given billow as:
Aggregate Supply Price Schedu
Level of Employment Aggregate Supply Pri
100 100
200 300
300 600
400 1100
500 2100
Determination of Effective Deman
Thelevelof employment is determined
at thepointwh
aggregatedemand priceequalstheaggregatesupp
This point is called effective demand.

Therefore,
effective
demand is thatlevelof demand
whe
the entrepreneur
expectto receiveequalswhatthe
receive
and hence, their profit is maximized
.

In thehypothetical
tableabove,aggregatedemand pr
aggregatesupplypriceare equalat the 400 le
employment. So,thisrepresents
theeffective
demand
a
amount of labor is employed in the economy
Effective demand can be expla
help offollowing schedule
Aggregate Demand and Supply Sc
Level of Aggregate Demand
Aggregate Sup
Employment Price Price
100 200 100
200 600 300
300 900 600
400 1100 1100
500 1200 2100
Graphically,
According toKeynes, therootcauseofunderemp
equilibrium isdeficiency
the of aggregate d

The aggregatedemandfunctiondependsup
consumptionfunctionand investment functi
causeof unemployment
maybefallin eithercons
expenditure or investment expenditur .
 To raisethe economyto the levelof full emp
requires
theraising
of thepointof effectivedem
increasingtheaggregatedemand, whichin turnm
increasedby raisingthe consumption or inv
expenditure

Graphically,
Importance of effective demand
 Importance of effective d

Themajorsignificance
of effective
demand
is thatit det
the level of employment in the economy.

Thereis positive
relationship
between
effective
dem
employment

Effective
demandindicatesthe valueof total outp
equals national income.
Thus,theprinciple
of effective
demandpointsouttheca
remedyof unemployment. Unemployment is cause
deficiency
of effectivedemand andit canbe remov
increase in consumption expenditure and in
The End