In macroeconomics, there are two major approaches used to solve problems that arise. The first approach is referred to as the Classical approach; the second is known as the Keynesian approach. This paper will compare and contrast how each approach’s theory would approach the unemployment rate dilemma in the economy. Unemployment is a macroeconomic phenomenon that directly affects people.
When a member of a family is unemployed, the family feels it in lost income and a reduced standard of living, because most people rely on their income to maintain their tandard of living, the loss of a Job will often directly threaten to reduce that standard of living. In terms of society, unemployment is harmful as well. Unemployed workers represent wasted production capability. This means that the economy is putting out less goods and services than it could be producing in other words the economy is working inefficiently.
This also means that there is less money being spent by consumers, which ultimately has the potential to lead to a higher unemployment rate, beginning a never-ending cycle. However, generally speaking while unemployment is harmful for individuals, there are some circumstances in which unemployment is both natural and beneficial for the economy as a whole. The national unemployment rate is defined as the percentage of unemployed workers in the total labor force. A closely watched economic indicator, the unemployment rate attracts a huge deal of media attention, especially during economic crisis such as recessions.
The United States has been suffering from what seems like a never- nding global economic crisis better known as 2007The Great Recession. According to the U. S. Bureau of Labor Statistics (2010) 9. 9% of Americans were without a Job, which is a huge Jump from 2007 unemployment rate, which was only 4. 4%, within a three stretch the unemployment rate increased by 5. 5% after the recession was declared over. Generally, employment rises during episodes of economic affluence and falls during recessions resulting in short-term unemployment (Miller, 2012).
However it eems as though we are currently dealing with long-term unemployment. According to Bureau of Labor Statistics the number of long-term unemployed (those Jobless for 27 weeks or more) was essentially unchanged at 4. 1 million in November. These individuals accounted for 37. 3 percent of the unemployed (2013). The classical approach theory in economics relates back to Says Law in which our economy is working efficiently and is fully employed. “It stressed economic freedom and promoted ideas such as laissez-faire and free competition. According to this law upply is in control and creates its own demand. The Classical economic theory is based off the assumption that free markets can regulate themselves if left alone, free of human intervention. Adam Smith’s book, ‘The Wealth of Nations’, stresses on there being an invisible hand that moves markets towards a natural equilibrium, without the requirement of any intervention at all. In other words, the division of labor and the free market will automatically tend toward an equilibrium that advances public interests. Unemployment : Economics By mrich