Hannah Grace S. Bielza
AC-301

The Keynesian Theory * In the depression of the 1930s democratic nations were concerned about the problem of inflation. Wherein, general level of prices for goods and services is rising and, consequently, the purchasing power of currency is falling. * Because of inflation, workers are unwilling to accept further cuts in their wages for the reason that their earnings were already cut down by unemployment and part-time work. It is really hard to work, earning a small amount of money while having a huge amount of expenses that’s why a lot of workers don’t want to cut their wages. * Explanation of wages and wage changes in this kind of setting inevitably directed attention to general wage levels rather than to wage rates in the labor markets. This means that the employers focus on this average wage paid to employees rather than the rate per hour or based on production. * John Maynard Keynes advanced his full employment theory by publishing “General Theory of Employment, Interest, and Money” in 1936 which provides basic analysis on which the theory is based. * To many theorists in the classical tradition, Adam Smith’s, “Wealth of the Nations” provided rationalization for policies they thought necessary but could not embrace with clear conscience. There’s no scholarly document to prove that this will fit more closely to the needs of the times.
Keyne’s Theory on Employment * Keynes admitted that the Classical and Neo classical doctrines were logical enough but were limited by many express or implied assumptions. So Keynes developed general theory to make it realistic. * Classical Theory had little to say about the fluctuations of employment. It assumed that production in any free enterprise economy would fluctuate closely between demand and supply that when the demand for labor goes up, wages become low, vice versa. * Wages, like any other price, would fall if the supply of labor exceeded the demand for it. The demand and supply of labor affected the wages of the workers. * The implication was that persistent or widespread unemployment could be caused only by stubborn refusal of workers to accept low wages. * Keynes saw that classical theory was inapplicable to the real world. At that time, unemployment is widespread and many workers couldn’t get a job at any wage at all. * Keynes argued that high wages could not be the main cause of unemployment. He believed that wage cut was theoretically equivalent in its effect to fall a rate of interest.
Labor Markets are not self correcting * Classical Theorists maintained that the market will take care of itself: if you leave the market alone, it will correct itself. * Keynesian Theorist argue that aggregate of labor markets is not self-correction. Reason:
1.) forces causing and maintaining full employment is largely outside of labor markets; 2.) self-correcting mechanism has not proven effective. * Keynesian Theorist argue that full employment is a function of national income. A larger income gives more employment to the workers for as the income increases, needs and wants increases where the producers require more workers to produce products. * Classical economists place emphasis on obtaining maximum output of goods and services desired by consumers through proper balancing of resources. Classical Theory focuses on the productivity where it gives more benefit for the owners or employers. * Keynesian Theorist place emphasis on attaining and maintaining full employment. (jobs for all)
Labor Supply is a Function of Money Wages * J.M. Keynes assumed that workers prefer to make their decisions in terms of money wage. * He assumed that money wages were apt to be “sticky” or rigid downward.

* Classical Theory- if supply labor increases, wages decreases. (SL2) * Keynesian Theory- pressure of labor unions and government results to sticky downward, thus wage level has to stay at W1. However, supply of labor cuts the demand curve at point B. The distance between QL2 and QL1 measures involuntary unemployment (willing to work but do not find employment).
The Cure of Unemployment * Keynesian theorists maintain that wages need not fall to maintain full employment, not like the classical theory that needs to adjust the wages depending to the demand and supply of the labourers. * Three reasons can be advanced for the undesirability of wage cuts as solution to solve the unemployment problem: * Inflation- prices going up, reduces wage rates that adversely affect the welfare of workers. * Government- set up minimum wage legislation, disallowing rates to go down. * Trade unions- organized industrial section who always works for the welfare of workers. * For Keynesians, to cure the problem of unemployment, national income must increase. * One way to increase national income is to entice investors to invest more. The more investors we have, the more work will be available for everyone and may increase more the national income which would result to increase of wages. * Keynesian Theory likes to think that the savings-investment (IS) functions are important factors to solve unemployment problem. Saving represents withdrawal of some money from the income stream. On the other hand, investment represents injection of money into the income stream. * More investments mean more investors and more investors mean greater demand for workers which would result to a higher employment rate. * The wages need not to go down in order to avoid unemployment.