Classical Theory Of Employment: Theories Of Employment

VI. Employment

A. Theories of Employment

In economics, full employment refers to an economic condition in which every individual is employed. It signifies the market condition where the demand for labor is equivalent to the supply of labor at every level of real wage. Full employment is the employment level at which every individual who desires to work at the prevalent wage rate gets employed.

1. Classical Theory of Employment by Adam Smith

The classical theory of employment was based upon two basic assumptions 1) that there is always enough expenditure or aggregate demand to purchase the total production at full-employment level of resources, and 2) that even when deficiency of aggregate expenditure or demand arises, the prices and wages

Keynesian or Modern Theory of Employment by John Maynard Keynes

The theory explains that employment is triggered by the aggregate demand for goods and services. When the demand for goods and services increases, production will correspondingly increase, resulting to more employment.

B. Categories of Unemployment

1. Season al Unemployment

Seasonal unemployment occurs in regular patterns, usually on an annual basis, and is caused by predictable changes in demand. seasonal unemployment occurs on a more or less fixed and predictable basis, as it is caused by shifts in demand that depend on the time of year. Seasonal unemployment is actually a type of structural unemployment as the structure of the economy changes on a seasonal basis and demand for workers changes accordingly.

2. Frictional Unemployment

Frictional unemployment is temporary unemployment associated with adjustments in a changing dynamic It results from imperfect or incomplete information and the difficulties in matching qualified workers with jobs. A college graduate who is actively looking for work is one example.

3. Structural

The formula was designed to show the relationship between real disposable income and consumer spending, the latter variable being what Keynes considered the most important determinant of short-term demand in an economy.

The Keynesian Consumption function expresses the level of consumer spending depending on three factors.

• Yd = disposable income (income after tax)

• a = autonomous consumption (consumption when income is zero. (e.g. even with no income, you may borrow to be able to buy food))

• b = marginal propensity to consume (the % of extra income that is spent). . Consumption function formula : C = a + b Yd

This shows that consumption is primarily determined by the level of disposable income (Yd) , where higher disposable income would lead to higher consumer spending.

At low incomes, people will spend a high proportion of their income or even spend everything they have. With low income, one may not be able to save, since he needs to spend for the basic needs. However, as incomes rise, people can afford the luxury of saving a higher proportion of their income. Therefore, as income rise, spending increases at a lower rate than disposable income. People with high incomes have a lower average propensity to