Conversely an increase in demand for goods and

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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 unemployment. 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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This document was uploaded on 03/18/2014 for the course ECON 202 at Gonzaga.

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