Employment & Wages

Question 1

What are different forms of unemployment?

Answer 1

Cyclical
Frictional
Structural

Question 2

Discuss features of Classical Labour Theory

Answer 2

Assumption of a single homogeneous market
- all jobs and all workers are alike
- perfect competition on the labour market
- Regulations and social programmes are seen as obstructing proper market
behaviour
- Economy works best under the principle of laissez faire
- There is no involuntary unemployment
- Unemployment occurs when the wage is too high
- Solution: Flexible and lower wages

Question 3

Discuss Keynesian Theory of Unemployment

Answer 3

• Unemployment due to insufficient demand for labour;
• direct result of insufficient demand for goods and services
• Aggregate demand has to increase to stimulate hiring
• Government policies could be effective in response to an economic downturn
• Falling wages make things worse: workers have less money to buy goods and
  services, leading to lower levels of business sales and further layoffs

Question 4

what are arguments made against classical model?

Answer 4

Wages might not fall quickly in response to labour surplus - employers may prefer to fire workers

• Wages adjust too slowly to keep labour market in equilibrium
• Falling wages do not necessarily result in full employment

Question 5

how does classical model return to full employment ?

Answer 5

The market for loanable funds