Macroeconomic Theory and Unemployment: A Comparison between the Keynesian and New Classical Model

Unemployment has been a cause for concern in the political economy since its inception, \nand viewed as a universal problem. Both the New Classical and Keynesians models ignore involuntary \nunemployment, which is an effect of labour supply. Thus, a pertinent question arises; Are the theoretical \nconstructs of unemployment the same for both schools of thought? This paper investigates and \ndiscusses the implications of the two schools of thought in relation to the mentioned constructs. Gaps \nin literature suggest that existing theories of unemployment and the macroeconomic theory are based \non problematic assumptions; which do not allow for a seamless policy framework. This has resulted in \nconflicting and contrasting dimensions between the two schools of thought. The paper adopted a \nqualitative approach, using content review method. This involves the review of various journal articles \nand publications. To compare the main difference between the Keynesian School and the New Classical \nSchool, we focused on macroeconomic Equilibrium; Monetary policy Effects of Unemployment; \nPhilips Curve and Supply of Labour. Analysis suggests that a near consensus is that there is no answer \nto unemployment conundrum for developing countries without them increasing their rate of capital \naccumulation, which must be at the same level with the growth of labour supply. The New Classical \nmodel posits that an efficient outcome is a consequence of free markets, which is self-regulating. They \nassume that in the long run, aggregate supply curve is inelastic; therefore, any shift from full \nemployment will only be transitory. However, Keynesians contend that the economy can be below full \ncapacity for a significant time because of market imperfections. Thus, they advocate a greater role for \nexpansionary fiscal policy to overcome recession. Policy makers should support micro and macro \nadjustments for effective fiscal policy. The issues discussed in the paper provide a template that could \nassist policymakers in improving policies that aim to reduce unemployment.