Explaining Unemployment

This chapter discusses the concept of unemployment. Unemployment by definition occurs when the supply of labour is greater than demand. The chapter exposes how classical economics can be misleading in explaining unemployment. Classical economics suggests that unemployment is only temporary and will disappear as wages fall. To counteract this view, John Maynard Keynes, the father of Keynesian economics, suggests that the main force driving the aggregate labour market is the feedback from consumer spending onto firms’ demand for labour. The Keynesian model explains persistent unemployment. Every expenditure on final goods and services ultimately becomes someone–s income. This explains how the economy can get stuck in a vicious circle of low employment and low expenditure. The chapter also shows that fiscal and monetary policies can be used to try to boost the economy out of such a recession.