Macroeconomic theory and unemployment: a comparison between the Keynesian and new classical model.

Abstract

Unemployment has been a cause for concern in the political economy since its inception, and viewed as a universal problem. Both the New Classical and Keynesians models ignore involuntary unemployment, which is an effect of labour supply. Thus, a pertinent question arises; Are the theoretical constructs of unemployment the same for both schools of thought? This paper investigates and discusses the implications of the two schools of thought in relation to the mentioned constructs. Gaps in literature suggest that existing theories of unemployment and the macroeconomic theory are based on problematic assumptions; which do not allow for a seamless policy framework. This has resulted in conflicting and contrasting dimensions between the two schools of thought. The paper adopted a qualitative approach, using content review method. This involves the review of various journal articles and publications. To compare the main difference between the Keynesian School and the New Classical School, we focused on macroeconomic Equilibrium; Monetary policy Effects of Unemployment; Philips Curve and Supply of Labour. Analysis suggests that a near consensus is that there is no answer to unemployment conundrum for developing countries without them increasing their rate of capital accumulation, which must be at the same level with the growth of labour supply. The New Classical model posits that an efficient outcome is a consequence of free markets, which is self-regulating. They assume that in the long run, aggregate supply curve is inelastic; therefore, any shift from full employment will only be transitory. However, Keynesians contend that the economy can be below full capacity for a significant time because of market imperfections. Thus, they advocate a greater role for expansionary fiscal policy to overcome recession. Policy makers should support micro and macro adjustments for effective fiscal policy. The issues discussed in the paper provide a template that could assist policymakers in improving policies that aim to reduce unemployment.