A Keynesian Solution to Classical Unemployment

Keith MacKinnon
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Keith MacKinnon: York University, Canada

Working Papers from York University, Department of Economics

Abstract: In a classical macroeconomic model, the real wage equals labor's marginal product and the real interest rate can fall no lower than the rate of investment. These rigidities may prevent labor market clearing. Economies with rapid labor supply growth, capital immobility and a low capital labor ratio will be prone to such `classical unemployment'. Downward ¡ãexibility in real wages restores full employment, lowers real interest rates and stimulates investment provided that ¡¥rms also perceive that they are rationed in output sales. Such quantity constraints have been identi¡¥ed by Clower (1965) as a critical feature in Keynes (1936).

Pages: 24 pages
Date: 1999-11
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