Compare and contrast the classical and Keynesian theory of Essay

Compare and contrast the classical and Keynesian theory of unemployment. Conclude by discussing which argument has been more convincing for you and why - Essay Example A lower wage rate will lead to an increase in the number of workers being employed and the vice versa. Unemployment occurs when there is excess supply of workers in the market at a particular wage level. The equilibrium level of the demand and supply for labour is established after the unemployed workers accept lower wages. The full employment level is associated with the equilibrium level in the labour market (Blanchard, 2005). Unemployment occurs when the wage level is above the equilibrium wage; hence, leading to a higher labour compared to the quantity being demanded in the market. As a result, unemployment can be classified as the difference between the supply and the demand. The flexibility of the wages has a direct effect on the level of unemployment. A decrease in the demand for a product will lead to a decrease in the demand for labour; hence, leading to high levels of unemployment. Consequently, the wage rate will fall but competition between the workers will cause them to accept the low wages; therefore, leading to a new equilibrium state. The theory explains a situation where low wage rates do not result to higher employment levels due to the employers are facing low demand for services and goods when the economy is in a recession (Phoa, Focardi and Fabozzi, 2007). The aggregate demand is the main determinant of the level of economic outputs during recessions. However, it does not have an equal effect on the productive ability off the economy but is influenced by certain determinants such as inflation and employment rates. According to the Keynesian theory, the changes in aggregate demand have short run effects on employment and output unlike in the prices. The unemployment occurs when the aggregate demand function intersects the aggregate supply function since the economy cannot experience a full employment level. The theory states that the government can use public investment programs to raise the aggregate