Identify the main planks of the classical thought. (4 Marks)

Question

a. Distinguish between voluntary and involuntary unemployment. (4 Marks)
b. Explain the process through which classical unemployment can occur in an economy.

Answer 1

Answer:

The main idea of the Classical school was that markets work best when they are free. The intervention of the government should be minimum or say that work or functioning of the market should be at the smallest role for government. The approach is strongly belief in the efficiency of free markets to generate economic development. Its more emphasis is on the organization rather than the employees working therein. Classical theory is a type of western capitalism concept or theory and prefer democratic capitalism instead of old monarch system. As per the Classical economists, the economy is always capable of achieving the natural level of real output, which is the level of real GDP that is obtained when the economy's resources are fully employed.

a) Voluntary unemployment is a situation when a person is unemployed because of not being able to find employment of his/her own choice. Every person has own values and belief system. People follow their dream and want to build their career in their interested area but not able to find it. But every person has different set of skills and efficiency level and other side market is very dynamic in nature and has complicated structure. It may be the reason of the negative difference between wages expecting and offered, job offer and expected job type, skills set and required skills etc.

Involuntary unemployment:
Involuntary unemployment is a situation where workers are willing to work at the market wage or just below but not get the job or work because of the many negative factors that are beyond their control. It may be the reason of lower level of demand for workforce, labour market inflexibility, implicit wage bargaining etc.

b) According to Classical unemployment, if the condition of unemployment occurs, it is a temporary or abnormal condition in the economy. In addition, classical economists also say that the condition of unemployment occurs due to the interference of government or private organizations in normal mechanism of market forces. Classical unemployment occurs when real wages are too high that increasing the surplus of labour supplied. Classical unemployment is sometimes known as real wage unemployment because it refers to real wages being too high. Classical economist suggest the the intervention of the government should be minimum or say that work or functioning of the market should be at the smallest role for government. Classical economists maintain that the economy is always capable of achieving the natural level of real GDP or output, which is the level of real GDP that is obtained when the economy's resources are fully employed.