The approach of new classical macroeconomics can be fruitfully applied in many areas of economics. Here we concentrate on two implications: the nature of the labor market and the Phillips curve.
Is unemployment voluntary or involuntary? We defined involuntary unemployment as a situation where qualified workers are unable to find jobs at the going age. By contrast new classical economists think that most unemployment is voluntary. In their view, labor markets adjust quickly after shocks as wages change to rebalance supply and demand. Unemployment, in this view increases because more people are hunting for better jobs during recessions, not because they cannot find jobs. People are unemployed because they have quit their jobs to look for higher paying ones rather than because wages are too high, as in the case of sticky wages unemployment.
One of the major challenges for any macroeconomic theory is to explain the business cycle in a way that is internally consistent and that conforms to the regularities of economic behavior. The classical approach to macroeconomics is attractive because it conforms well to most of the microeconomics of supply and demand. But the challenge is to explain important features of business cycles, such as the Philips curve or Okun Law.
Is unemployment voluntary or involuntary? We defined involuntary unemployment as a situation where qualified workers are unable to find jobs at the going age. By contrast new classical economists think that most unemployment is voluntary. In their view, labor markets adjust quickly after shocks as wages change to rebalance supply and demand. Unemployment, in this view increases because more people are hunting for better jobs during recessions, not because they cannot find jobs. People are unemployed because they have quit their jobs to look for higher paying ones rather than because wages are too high, as in the case of sticky wages unemployment.
One of the major challenges for any macroeconomic theory is to explain the business cycle in a way that is internally consistent and that conforms to the regularities of economic behavior. The classical approach to macroeconomics is attractive because it conforms well to most of the microeconomics of supply and demand. But the challenge is to explain important features of business cycles, such as the Philips curve or Okun Law.
