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A Keynesian Solution to Classical Unemployment

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Author Info
Keith MacKinnon (York University, Canada)
Abstract

In a classical macroeconomic model, the real wage equals labor's marginal product and the real interest rate can fall no lower than the rate of investment. These rigidities may prevent labor market clearing. Economies with rapid labor supply growth, capital immobility and a low capital labor ratio will be prone to such `classical unemployment'. Downward ¡ãexibility in real wages restores full employment, lowers real interest rates and stimulates investment provided that ¡¥rms also perceive that they are rationed in output sales. Such quantity constraints have been identi¡¥ed by Clower (1965) as a critical feature in Keynes (1936).

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File URL: http://dept.econ.yorku.ca/research/workingPapers/working_papers/emp2.pdf
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File Function: First version, 1999
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Paper provided by York University, Department of Economics in its series Working Papers with number 1999_05.

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Length: 24 pages
Date of creation: Nov 1999
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Handle: RePEc:yca:wpaper:1999_05

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  1. Douglas D. Purvis, 1976. "The Neoclassical Theory of the Firm: A Note on the Production and Investment Decisions," Canadian Journal of Economics, Canadian Economics Association, vol. 9(2), pages 331-41, May. [Downloadable!] (restricted)
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  2. Barro, Robert J & Grossman, Herschel I, 1971. "A General Disequilibrium Model of Income and Employment," American Economic Review, American Economic Association, vol. 61(1), pages 82-93, March. [Downloadable!] (restricted)
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