Question

Neo-Classical Economics assumes the perfectly competitive labor market; therefore, Neo-Classical Economics argues wage flexibility clear the labor market. In the labor market, equilibrium wage rate is determined by the demand for labor and the supply of labor, and at the equilibrium everyone who wants to work at the equilibrium wage rate finds a job.

a) Graph equilibrium in the labor market

. b) What is the unemployment rate if the labor market is at equilibrium?

c) How does the labor market adjust to new equilibrium if the demand for labor decreases sharply? Graph your answer.

d) Should government regulate the labor market, according to Neo-Classical Economics? Why or Why not? Explain your answer. e) Recently 6.6 million Americans have filed for unemployment benefit. How would a neo-classical economist approaches to this news? (8 points)

Answer 1

​a. Graph of labor market at equilibrium

As you can see from the graph the points where demand and supply of labor meets is equilibrium point.W is wage at equilibrium and L is the quantity of labor at equilibrium point

​​​​b . When the market is in equilibrium the unemployment rate is equal to natural unemployment rate i.e the people who do not have the skills to do the job or the people not willing to join at those wages

C. Now if the demand for labor decreases sharply, below graph shows the shift in equilibrium

As it can be seen when demand decreases from D1 to D2 the equilibrium shifts towards the left ,this showing a decease in wages as the supply remains the same

D. In the neoclassical approach output and employment depend on the real variables like total aggregate produce function and marginal productivity. Therefore in the long run even if the government changes the monetary or fiscal policy the market forces will again bring the output and employment at equilibrium ,thus the government must not interfere in labor market according to neo classical approach.

e. Since there has been a slowdown in the market ,the demand for labor has decreased and this is leading to market distortion in short term.Since at this situation supply is more than demand ,it has lead to involuntary unemployment. Since this has been brought by a disruption in market due to Corona ,the market will again attain equilibrium.

But if the market goes into a long recessionary phase this temporary unemployment will become a permanent unemployment and the wage levels and equilibrium will also shift according to it.