classical unemployment

According to "classical economic theory" originally developed by Adams, Ricardo, Malthus and others in late 18th century unemployment is explained simply by the real wages being higher than the market-equilibrium wage. In modern economics unemployment is seen as a more complicated phenomenon, and the term classical unemployment is used to refer to the component of overall unemployment caused by too high wage expectations. This kind of situation is suggested to arise e.g. as a result of a too generous minimum wage law or labor union influence.

,There can be "Keynesian" and "classical" unemployment. Indeed there can be both at the same time: the real wage might be too high to allow full employment with existing capital stock, while at the same time aggregate demand is inadequate to take off the market what firms would wish to produce. Changes in the real wage could have demand-side and supply-side effects. [ Nobel laureate Robert M. Solow in his prize lecture on Dec 8th, 1987.

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