Who proposed the wage cut policy?

In fact, Keynes made two-pronged attack on the classical view of cutting wages to remove unemployment. ADVERTISEMENTS: First, he challenged the classical view that wage cuts would promote employment at times of depression on grounds of practical feasibility.

Can automatic wage price flexibility ensure full employment?

The classical theory assumes over the long period the existence of full employment without inflation. Given wage-price flexibility, there are automatic competitive forces in the economic system that tend to maintain full employment, and make the economy produce output at that level in the long run.

Who suggested a way to cut wages to solve the problem of involuntary unemployment?

The classicists have advocated “the money wage cut policy” to solve the problem of unemployment. ADVERTISEMENTS: The classical economist believed that involuntary unemployment, if it existed in an economy, was a consequence of wage structure.

What is wage price flexibility?

PRICE AND WAGE FLEXIBILITY. The classical theory proposes that all markets reequilibrate because of adjustments in prices and wages which are flexible. For instance, if an excess in the labor force or products exist, the wage or price of these will adjust to absorb the excess.

What is the meaning of wage cut?

the act of reducing a salary. synonyms: pay cut. type of: cut. the act of reducing the amount or number.

Who gave the equation of cash balance?

The Cambridge equation first appeared in print in 1917 in Pigou’s “Value of Money”. Keynes contributed to the theory with his 1923 Tract on Monetary Reform.

Do you witness wage price flexibility in the economy?

If prices and wages are flexible, markets reequilibrate. If wages are flexible as the classical economists argue, then a decrease in wages does allow firms to hire more workers. Only those who are reluctant to work for lower wages would then remain unemployed.

What is the flexibility of prices and wages?

Wage flexibility is defined as the speed with which real wages react to macroeconomic condition and it is measured as the responsiveness of real wages to shocks, usually measured as unemployment variations.

Why are firms unwilling or unable to cut wages?

There can be several reasons why both firms and workers resist cuts in nominal wages. Employment contracts. If there is a fall in demand for labour (due to recession or fall in popularity of product), the firm may be stuck with the employment contract and be unable to cut wages at least in the short-term.

Is the Pigou effect on wage cut and full employment?

Let us make an in-depth study of the Pigou effect on wage cut and full employment with its limitations. Keynes argument that the liquidity trap would prevent wage price flexibility from restoring full employment has not gone unchallenged.

What did Pigou want to do about unemployment?

Pigou envisioned cuts in social benefits and/or charity for the poor, combined with cuts in taxes on the wealthy, as a method of boosting employment. Keywords: Keynesian Macroeconomics, Classical Macroeconomics, Unemployment JEL Codes: B22.

Why was the wage cut necessary to restore full employment?

The viewpoint of classical economists, especially A.C. Pigou, the renowned British economist, was that wage-price flexibility would ensure full employment and there­fore they recommended cut in money wages to increase employment and restore full-employment equilib­rium.

How is the Pigou effect related to consumption?

The mechanism by which consumption rises is commonly called ‘Pigou Effect’. The essence of ‘Pigou Effect’ is that an overall reduction leads to increased spending on goods and services. (i) That individuals hold money, balances and spend them according to a desired ratio between these and their incomes,