Question

What are the neoclassical theory of unemployment and its policy implications?

Answer 1

Answer :-

The neoclassical view of unemployment tends to focus attention away from the problem of cyclical unemployment, that is, unemployment caused by recession. while putting more attention on the issue of the rates of unemployment that prevail even when the economy is operating at potential GDP. To put it another way, the neoclassical view of unemployment tends to focus on how public policy can be adjusted to reduce the natural rate of unemployment.

Neoclassicals disregard any prolonged unemployment;

• If one is unemployed it is because they are not working hard or smart enough to find work
• Not because there are not enough jobs available

Over the long run, the level of potential GDP determines the size of real GDP. When economists refer to "potential GDP" they are referring to that level of output that can be achieved when all resources (land, labor, capital, and entrepreneurial ability) are fully employed. While the unemployment rate in labor markets will never be zero, full employment in the labor market refers to zero cyclical unemployment.