Classical unemployment

Classical unemployment, also known as real wage unemployment, is a type of unemployment that occurs when real wages for a job are set above the market-clearing level,leading to a surplus of labor supplied over labor demanded.
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Updated on Jun 5, 2024
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3 Key Takeaways

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  • It’s caused by wages being higher than the equilibrium level determined by supply and demand.
  • It’s often associated with minimum wage laws, labor unions, and efficiency wages.
  • It can be addressed by measures that increase labor demand or reduce the supply of labor at a given wage level.

What is Classical Unemployment?

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Classical unemployment is a concept within classical economics that posits that unemployment arises due to rigidities in the labor market, particularly wages that are set above the level at which the quantity of labor supplied equals the quantity of labor demanded. This surplus of labor supply results in unemployment.

Importance of Understanding Classical Unemployment

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  • Explains Structural Unemployment: It helps to explain why unemployment can persist even when there is economic growth.
  • Policy Implications: Understanding the causes of classical unemployment can inform policies aimed at reducing it, such as labor market reforms or targeted training programs.
  • Wage Determination: It highlights the importance of wage flexibility in ensuring a well-functioning labor market.

How Classical Unemployment for example, due to minimum wage laws or union bargaining, the quantity of labor supplied will exceed the quantity demanded. This excess supply of labor manifests as unemployment.

Examples of Classical Unemployment

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  • Minimum Wage Laws: When the minimum wage is set above the equilibrium wage, it can lead to unemployment, especially among low-skilled workers.
  • Labor Unions: Strong labor unions can negotiate higher wages for their members, potentially leading to unemployment for workers outside the union.
  • Efficiency Wages: Some firms may choose to pay above-market wages to increase worker productivity and reduce turnover. However, this can also lead to unemployment as fewer workers are hired at the higher wage.

Real-World Application of Addressing Classical Unemployment

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Addressing classical unemployment often involves measures aimed at increasing labor demand or making wages more flexible. This could include:

  • Reducing Minimum Wages: Lowering or eliminating minimum wage laws could potentially increase employment, particularly for low-skilled workers.
  • Weakening Labor Unions: Reducing the bargaining power of labor unions could lead to more flexible wages and potentially reduce unemployment.
  • Providing Training and Education: Improving the skills of the workforce can increase their productivity and make them more attractive to employers, potentially leading to higher demand for labor.

It’s important to note that these policies can be controversial and have different impacts on various groups within the economy. The optimal approach to addressing classical unemployment will depend on the specific circumstances of each country or region.


Sources & references

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