Labour Market Equilibrium

 demand for labour is a derived demand

In the classical model the real wage rate (and not

nominal) of labour is determined by the

intersection of demand and supply curve of labour.
In the long run the demand and supply of labour is
established at the level where the wage rate of labour
is equal to both the Marginal Revenue Productivity
and Average Revenue Productivity.
Trade unions can not enhance wages without
creating unemployment.
When rise in wages increase efficiency of workers,
wages.

Can be raised without creating unemployment and

inflation.
Classical advocated abolishing minimum wages, unions
and long – term contracts to increase labour market
flexibility.
To sum up, according to classical unemployment is
a result of high and rigid real wages.
According to Keynes, it is not real but nominal
wages that are negotiated between employers and
employees.
Secondly nominal wage cuts would be difficult to
put in to effect because of laws and wage
contracts.
Thirdly, reduction in nominal wages would lead to
reduction in consumption spending which could
deepen recession.

Fourthly, if wages and prices were falling, people would

start to expect them fall further triggering spiral
downward.
Reduction in wage is a double edged weapon – it
results in cost reduction together with reduction in
incomes- consumption expenditure, aggregate
demand, expected profits, investment consumer
goods industry, capital goods industry and the
overall level of economic growth and well being of
people.
The principal difference between classical and
Keynesian system is – the downward inflexibility
of money wages at loss than full employment. It is
this feature of the Keynesian System which leads
to the possibility of an equilibrium at less full
employment level.