The Employment Limit

Abstract

On its usual assumptions — of perfect competition, perfect knowledge of technology, no time lags, and no uncertainty — neoclassical theory predicts that, with given supplies of the factors and all workers identical, both in their productivity and in their willingness to work, full equilibrium will exist when the real wage is equal to the marginal product of labour. The aggregate supply of labour will then be equal to the aggregate demand for labour, and there will be no involuntary unemployment. If, in fact, there appears to be some involuntary unemployment, it must mean that one or more of the assumptions of the theory is being violated. The finger used to be pointed at trade unions which, by fixing a monopoly price for the labour of their members, force the wage above its equilibrium level and generate open unemployment. In more recent years, the blame is more often placed on government policies imposing minimum wages.