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A Keynesian Solution to Classical Unemployment

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  • 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).

Suggested Citation

  • Keith MacKinnon, 1999. "A Keynesian Solution to Classical Unemployment," Working Papers 1999_05, York University, Department of Economics.
    • Handle: RePEc:yca:wpaper:1999_05
    as

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    File URL: http://dept.econ.yorku.ca/research/workingPapers/working_papers/emp2.pdf
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    References listed on IDEAS

    as
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    4. Robert E. Lucas & Jr., 1967. "Adjustment Costs and the Theory of Supply," Journal of Political Economy, University of Chicago Press, vol. 75, pages 321-321.
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