The Classical And Keynesian Theories Of Unemployment

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The Classical and Keynesian theories of unemployment offer explanations to describe why unemployment rises in an economy. They are both different school of thoughts and have different views when it comes to unemployment. The Classical school was created before Keynes and their theories were seen as the staple theories to follow when it came to economic theory.
All Classical explanations of unemployment assume that the labour market clears and the theory of unemployment implies that the labour market performance is being obstructed in some way. “The major characteristic of the Classical approach is that agents continuously optimize and markets continuously clear; hence there can be no involuntary unemployment.” (Lipsey and Chrystal 2011, p.586) The approach argues that unemployment is the product of voluntary decisions made by everyday people who are choosing to do what they do, including spending some time out of unemployment. “The Classical model in its purest form assumes that the labour market clears via real-wage adjustment, and that the demand for labour depends only on the properties of the production function.” (Hillier 1991, p.21) In this theory, it is presumed that the markets act as defined by the idealized supply and demand model: the labour market is seen as though it were a single, stagnant market, illustrated by perfect competition, spot transactions and institutions for double-auction bidding.
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