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IAI Actuarial Core Principles · Business Economics · Main economic schools and their key features

Under the classical view of the labour market, a worker's unemployment in an economy with fully flexible wages would be described as which of the following?

In the classical model flexible wages clear the labour market, so any remaining unemployment is voluntary or frictional rather than involuntary. Workers unwilling to accept the market wage or searching for jobs account for it, and there is no demand-deficient unemployment.

  1. ADemand-deficient unemployment that needs fiscal stimulus
  2. BInvoluntary unemployment persisting at the equilibrium wage
  3. CVoluntary or frictional unemployment, since the wage adjusts to clear the marketCorrect
  4. DStructural unemployment caused by minimum wage law only
  5. Unemployment that rises whenever the money supply grows

Explanation

With flexible real wages, the classical labour market clears at full employment. Remaining joblessness is voluntary (workers refusing the going wage) or frictional (job search). Option B is the Keynesian concept, and A rests on a demand shortfall that the classical model excludes.

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