Question

What determines the unemployment rate in the Long Run? Explain using the Classical model, Keynesian model or Phillips curve.

Answer 1

Unemployment here means the situation where at the prevailing wage rates, no worker is employed.

According to the classical economists , there will be a full employment situation in the capitalist economy. But this theory was considered and criticized by J.M Keynes during the great depression years of 1930s.

Keynes rejected the above stated notion of full employment instead he suggested the full employment as a special case and not a general case. Full employment is a temporary phenomenon. Thus the Keynes theory is general.

Basically his theory is demand deficient theory. He has visualised the situation of full employment from the demand side. Keyes theory is the short run theory i.e., labour, Technology, population etc do not change in the short run. Keynes once stated that 'in the long run we all are dead'so there is no use of presenting long run theories. Therefore it is based on the national output of a country and thus Keynes theory is also known as theory of income determination.

Keynes focussed on the demand stimulating policies to cure unemployment. This unemployment can be recovered by stimulating aggregate demand . Aggregate demand is the sum total of consumption and investment. An increase in the consumption demand and investment demand, the employment increases. Thus, Keynes theory state that the unemployment prevail due to low aggregate demand and therefore he focused on the demand stimulating policies.