ed; it is also a problem for those who are still working (htt2). The burden of providing the money for government services, in the form of taxes, falls increasingly upon those still employed when large numbers of people are not working (htt2).
Yet unemployment, like most things that affect the economy, is not all bad when the whole economic system (macroeconomics) is studied (htt2). For instance, from the viewpoint of an employer, a high unemployment rate creates an advantage; it gives them a wide range of applicants for any job opening that they have available, and it also helps decrease the amount of wages that an employer has to pay their employees (htt2). In economic lingo, high unemployment creates a labor surplus. Conversely a low unemployment rate results is less choices when selecting workers and being forced to increase wages; this in turn will affect the whole economy by driving up prices on goods and services. It is for these reasons that economists sometimes debate what the ideal unemployment rate should be for an economy (htt2). Both high and low unemployment rates create problems for the economy (htt2) (Eckstein, 2009)
The Classical Theory of Unemployment
Figure 1: A Supply and Demand Model for Labor. In a smoothly functioning <a href='/article/Market' title='Market'>market</a>, the equilibrium wage and quantity of labor would be set by market forces. (Source: <a href='http://ase.tufts.edu/gdae/' class='external text' title='http://ase.tufts.edu/gdae/' rel='nofollow'>GDAE</a>)Figure 1: A Supply and Demand Model for Labor. In a smoothly functioning market, the equilibrium wage and quantity of labor would be set by market forces (htt3) (Source: GDAE)
In Classical economic theory, unemployment is seen as a sign that smooth labor market functioning is being obstructed in some way (htt3). The Classical approach assumes that markets behave as described by the idealized supply-and-demand model: the labor market is seen as though it were a single, static market, characterized by perfect competition, spot transactions, 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 t