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Unformatted text preview: has to deal with how quickly wages
adjust to equilibrium. Ryan W. Herzog (GU) Labor Market February 5, 2014 37 / 40 Views Adjustment in the Labor Market How long will wages take to adjust. There are two views:
The Classical school (Adam Smith) assumes wages adjust immediate,
involuntary unemployment does not exist.
The Keynesian school (John Maynard Keynes) assumes wages are
slow to adjust, cause large and persistent unemployment. Ryan W. Herzog (GU) Labor Market February 5, 2014 38 / 40 Views Classical School The Classical school assumes prices and wages adjust immediately.
In response to the drop in demand, ﬁrms lower prices and wages.
Equilibrium is quickly restored in the labor market.
The economy is always operating at the natural rate of
This result has important policy implications. Since the economy is
always operating new full employment there is little need for
stabilizing policies. Ryan W. Herzog (GU) Labor Market February 5, 2014 39 / 40 Views Keynesian School The Keynesian school assumes prices and wages are slow to adjust
In response to the drop in demand, ﬁrms cut production (not prices).
Wages remain above equilibrium wages.
Unemployment increases as a result of the drop in demand.
If the labor market is slow to adjust then there is room for stabilizing
polices. Ryan W. Herzog (GU) Labor Market February 5, 2014 40 / 40...
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