Classical economists belive that lower wages will create jobs. But during a recession when firms are facing low demand and not producing a lotwhy would they hire more workers

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pohnpei397's profile pic

pohnpei397 | College Teacher | (Level 3) Distinguished Educator

Posted on

Classical economists would blame this largely on unions and contracts.  The idea behind classical economics is that wages will be able to move down very quickly.  That would mean that businesses would be able to hire people for much lower wages and would be able to reduce the wages of employees that they already have.

The problem, they would say, is that unions and contracts make wages "sticky."  They make it so that wages will not fall.  This means that the companies cannot hire and supply cannot create its own demand.

krishna-agrawala's profile pic

krishna-agrawala | College Teacher | (Level 3) Valedictorian

Posted on

The question makes some assumptions which are not valid. Classical economics does not say that lower wages will create jobs or increase employment. Based on principles of classical economics, we can only say that the the number of people opting to take up paid employments, rather than engage in some other economic activities like farming or business, and their wages are determined by the interaction of market forces of demand, supply, and prices.

Also, we must remember that every principle of classical economics is not 100% valid. Though classical economics plays a very important part in understanding the economic behaviour of individuals and societies, there are many limitations of classical economics. To begin with most of the principles of classical economics are valid under some specific conditions, which do not always exist in reality. Second, there are many aspects of behavior which are not covered by it.

Recessionary behavior is one area which is not covered adequately by classical economics. And the suggestion of increasing employment as a means of overcoming recession is not justified based on classical economics. This method of overcoming recession has emerged out of principles of economics put forward by Keynes in 1922's and later as an alternative to purely classical economics.

The idea of hiring people and not reducing wages to overcome recession is supported on the grounds that such an action will eventually stimulate demand leading to improvement of profitability of industries also. Of course, this is not the only means of overcoming the recession. It is only one of several measures and all these must mesh together well to be effective.

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