Macroeconomic Theory and Unemployment: A Comparison between the Keynesian and New Classical Model

Authors

  • Kanayo Ogujiuba
  • Megan Cornelissen

Keywords:

Unemployment; Keynesian; Classical; Policy

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.

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Published

2020-05-26

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Section

Business Administration and Business Economics