ansactions, and institutions for double-auction bidding (htt3).
Such an abstract labor market is depicted in Figure 1. In this case “quantity” is not measured as a number of things (like apartments or swimsuits) but rather a quantity of labor services (htt3). We can think of this quantity as being measured, for example, by the number of workers working full days over a given time period. The “price” of labor is the (real) wage (in this case, per day) (htt3). Workers supply labor, while employers demand it. We assume that every unit of labor services is the same, and every worker in this market will get exactly the same wage. The equilibrium wage in this example is WE and the equilibrium quantity of labor supplied is at LE (htt3). In Figure 1, where the market is free to adjust, there is no involuntary unemployment. Everyone who wants a job at the going wage gets one. There may be many people who would offer their services on this market if the wage were higher—as the portion of the supply curve to the right of LE demonstrates (htt3). But, given the currently offered wage rate, these people have made a rational choice not to participate in this labor market (2006).
Figure 2: Classical Unemployment. In a Classical (idealized) <a href='/article/Market' title='Market'>market</a> for labor, the only thing that can cause true <a href='/article/Types_of_unemployment' title='Types of unemployment'>unemployment</a> is something that interferes with the adjustments of <a href='/w/index.php?title=Free_market&action=edit&redlink=1' class='new' title='Free market (page does not exist)'>free markets</a>, such as a legal minimum wage. (Source: <a href='http://ase.tufts.edu/gdae/' class='external text' title='http://ase.tufts.edu/gdae/' rel='nofollow'>GDAE</a>)Figure 2: Classical Unemployment. In a Classical (idealized) market for labor, the only thing that can cause true unemployment is something that interferes with the adjustments of free markets, such as a legal minimum wage (htt3).
Within the Classical model, the only way true, involuntary unemployment can exist is if something gets in the way of market forces. The presence of a legal minimum wage is commonly pointed to as one such factor. As illustrated in Figure 2, if employers are required to pay a minimum wage of W* (“W-star”) that is above the equilibrium wage, this model predicts that they will hire fewer workers (htt3). At an artificially high wage W*, employers want to hire only LD workers. But at that wage, LS people want jobs (htt3). There is a situation of surplus (htt3). The market is, in this case, prevented from adjusting to equilibrium by legal restrictions on employers. Now there are people who want a job at the going wage, but can’t find one. That is, they are unemployed (htt3).
The minimum wage only affects a portion of the workforce, however—people who are relatively unskilled, including many teenagers. But unemployment tends to affect people at all wage levels (htt3). Classical economists suggest other “market interference” reasons for unemployment, as well (htt3). The economy might provide less than the optimal number of jobs, they believe, because:
regulations on businesses reduce their growth, restricting growth in the demand for labor
labor-related regulations (such as safety regulations, mandated benefits, or restrictions on layoffs and firings) and labor union activities increase the cost of labor to businesses, causing them to turn towards labor-saving technologies and thus reducing job growth
public “safety net” policies such as disability insurance and unemployment insurance reduces employment by causing people to become less willing to seek work (htt3)(Cleveland, 2006)
The Keynesian theory of unemployment is that an increase in unemployment reduces income, which reduces consumption, and reduces aggregate output (keynesian, 2010). Individuals base decisions on current income receipts (keynesian, 2010). Unemployment benefits thus serve to compensate the job loser from the fall in income. In the Keynesian theory, unemployment could be reduced if money wag