Classical theory of employment

• The entire classical theory depends upon the Say’s law of market.

• According to Sir J.B.Say, “Supply creates its own demand”.

• Economy always work on full employment level. This is so because economy keeps on employing the unutilized resources.

• There is no scope for voluntary unemployment.

• The wage flexibility helps in maintaining the full employment level in an economy.

• The mechanism of interest rate flexibility brings about the equilibrium between the savings and investment.

• Equilibrium is established through market mechanism.

• Therefore, there is no need for state intervention.

Pillars of classical theory

• Equilibrium in labour market-wage flexibility

• Money market

• Goods and services market

Essence of classical economics: The aggregate production function:

• Y=F(K,N) Y=National Income K=Fixed Capital N=Labour In the classical model,

employment and output are determined by the factors operating on the supply side of labour market.

• Production is the only source of demand• Production does not depend on AD only

but also on prices.• Deficiency in AD will be made up by

changes in prices.• With a fall in wages of labour all

workers will get employment.• Voluntary unemployment vs involuntary

unemployment vs policy implication.• Govts. & trade unions are responsible

for unemployment.

_ Agg. Supply curve depends on Physical and Technical conditions of production.

• More labourers will be employed only if the entrepreneurs expect to receive greater revenue so as to cover rise in costs.

• In times of recession agg. demand should be raised so that equilibrium be achieved at higher levels.

• Increase in agg. demand will lead to inflation after full employment has already been achieved.