Rigid wage rates and unemployment

Rigid wage rates and unemployment - Rigid wage rates and...

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Rigid wage rates and unemployment : Under the classical model as a rule there is no general and involuntary unemployment. Moreover, if there is some deficiency in demand and consequent unemployment in certain sections of the economy , it can at once be cured with the help of a cut in the wage rates. Keynes does not accept flexible wage rate as a solution to the unemployment problem. His chief argument in this respect is that workers are under money illusion . Therefore they strongly resist any attempt to cut down money wage rates. Moreover the working class is well organized and trade unions will thwart any such efforts (as wage cuts) on the part of employers. Therefore a cut in wage rate will not be possible and hence there will be a persistent unemployment condition. Let’s present this with the help of a figure containing aggregate demand and aggregate supply curves.
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There are two parts of figure 23. In the upper part ( A ) is shown Effective Demand Curves generating real income levels
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Rigid wage rates and unemployment - Rigid wage rates and...

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