Do Wages Fall?

According to classical economics unemployment cannot happen. If there is massive unemployment then is it true that wages will fall and laborer does not want to work at lower level of wages. This will cause to increase demand of labor due to low wages and supply of labor will decrease causing an elimination of unemployment.

Real life example contradicts with this classical economic theory. In IIUI there about 1,000 applicants applied for the post of Naib-Qasid. Now according to standard economic theory university should reduce the pay scale but it didn’t happen. Similarly Naib-Qasid also was not willing to work at lower wages. So, there was excess demand but there was no movement in the wages. This is not a single incident of this kind but it happens all over the world. It does not happen that wages fall to reduce unemployment, therefore, unemployment persist. According to classical theory unemployment cannot exist but it’s a temporary phenomenon as wages takes a little bit time to adjust. But in reality wage does not fall to eliminate the unemployment from the economy.

Why does not wage fall to eliminate unemployment? Keynes argued that prices are sticky. This is one of his assumptions. In fact this also does not really makes lot of sense because in Great Depression wages did fluctuates quite a lot and it did went down so, it was not that it was fixed in nominal terms. But there is something that real wage did not really fall very much. The main point is the conventional economic theory is incapable of dealing with most important economic problem which is unemployment, as according to economic theory the unemployment does not exist. In fact Real Business Cycle School says that labor market is in equilibrium which means if someone is unemployed he is unemployed by choice as he does not want to work at the market wage because wage is too low. Other people have mocked this RBC view by says that according to RBC Great Depression is actually a Great Vacation as people did not want to work at low wages so they took a vacation from the job. But it is really not the case.

Unemployment is the most important economic problem of any nation as if everybody is employed then there not only the productive capacity of the nation will be high but everybody can also uplift/support his family. But economic theory does not give any clue to solve this crucial issue.