Classical Theory Of Unemployment

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Review of Theories
2.2.1 Theories of Unemployment Over the years, numerous theoretical hypotheses/theories have been offered to explain the linkage between productivity (economic) growth and unemployment in both developing and developed economies. Due to the contentious debate as to whether or not real business cycle actually accounts for the nexus between unemployment and productivity growth or not. Hence, this current study would highlight and briefly discuss few of such theories which among others includes; the Veblen theory of unemployment, job Search-matching theory, theory of low – frequency movement via asymmetric real wage rigidities etc. Classical Theory of Unemployment The classical theory, as analyzed by Pigou (1933) and Solow (1981), argues that the labor market consists of demand and supply of labor. The demand for labor is seen as a derived demand which is gotten from the downward movement of the marginal product of labor. The demand curve is usually a negative function of the real wage in the sense that if wages increase the quantity demanded for labor will decline and vise-versa. The quantity of labor supplied is dependent on the worker 's choice whether to spend part of time working or not working (leisure). The supply of hours worked by an individual has a positive function with the real wage, because if the real wage increases, workers are willing to supply more hours of work to the market. At equilibrium, demand and supply of labor are seen

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