unit 3 Classical theory employment

 

Very short

1.     What is voluntary unemployment ?

Ans ; Voluntary unemployment is type of unemployment in which people are unemployed due to their choice or they are not working due to laziness or they are not interested to work.

2.     What is meant by distinguished unemployment ?

Ans : Distinguished unemployment is the situation in which the person seems to be employed but infact he is not employed. In this type of unemployment, the unemployment person is not visible or h/she is hidden. That’s why this type of unemployment is also called hidden unemployment.

 

3.     What are the various types of unemployment ?

Types of unemployment are as follows :

a.     Open unemployment

b.     Under unemployment

c.     Distinguished unemployment

d.     seasonal unemployment

 

Descriptive question answer :

4.     Explain the process of labour market equilibrium in relation to achieve full employment.

Ans : According to the classical theory of unemployment, other things remains the same, the wage rate flexibility assumes that, in the competitive market full employment is provided and full employment output is produced. Real wage rate is determined by the force of  demand and supply in the labour market. Demand for labour is negative function of real wage rate whereas of labour is positive function of real wage rate. The real wage rate is determined at the level where demand for labour and supply for labour are equal. This level also represent full employment equilibrium level. If there is some unemployment, lebours will compete for job and real wage rate falls. A fall wage rate lead to increase demand for lebours and decrease the supply of labour. This will remove unemployment. Thus, flexibility of real wage rate ensures the full employment.

According to the classical theory, unemployment is the result in rigidy of wage structure and interface of automatic working of the labour market. When government interfaces by recognizing the trade union, passing minimum wage legislation, labour will adopt monopolistic behavior, wage rate are pushed up which lead to unemployment. Only the flexibility under full competitive market ensure the full employment.

 

It can be described in the following figure :

In the figure S_L represents the aggregate supply curve for lebour & D_L represents the aggregate demand curve for labour. These curve intersect at the point E determining equilibrium wage rate at employment ON.

If real wage rate will maintain higher level (p/w)1 , supply of labour will exceed demand for labour by PQ at employment N,N2 which indicates amount of unemployment. Labour market being competitive, unemployment of labour will reduce wage rate to the original equilibrium level (p/w). This will remove unemployment.

On the other hand, when real wage rate is maintained lower at (p/w)2 , Demand for labour will exceed for supply for labour at RS. Which indicates the shortage of labour. The competition among lebour to hire lebour push the wage rate to original equilibrium level (p/w).