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In truth, NRU is essentially a long-term phenomenon.It is the rate of unemployment towards which the economy gravitates in the long run, subject to the existing imperfections in the labour market which make it difficult for workers to find jobs easily and quickly.
Under competitive conditions, this leads firms to equate the real wage with the marginal product of labour.
Hence the demand for labour schedule is a direct reflection of the marginal physical product of labour (MPPwill be a decreasing function of the level of employment, and so the demand for labour varies inversely with the real wage.
If there occurred any unemployment it would be of a purely temporary nature.
The cause of such unemployment was too high a real wage.
Clearly, Keynes wanted to focus on a particular type of involuntary unemployment.
Don Patinkin also used the static labour supply definition in his well-known analysis of involuntary unemployment: The norm of reference to be used in defining involuntary unemployment is the supply curve for labour as long as workers are ‘on their labour supply curve’—that is, as long as they succeed in selling all the labour they want to at the prevailing real wage rate—a state of full employment will be said to exist in the economy. Pigou proposed measuring involuntary unemployment of a group of persons by the number of hours that these persons would have been willing to provide at the current rate of wages under current conditions of employment.The operation of the Say’s Law (which states that demand creates its own supply) and sufficient wage-price flexibility, they believed, would ensure automatic full employment.Thus, in the classical theory, there was no possibility of unemployment.Unemployment can be divided into different types according to the reasons for its occurrence.For example, there is frictional unemployment, which arises when a person is temporarily unemployed while moving between jobs.The above definition of involuntary unemployment based on the labour supply curve was used by the ‘classical’ economists. According to Keynes, however, classical theories (such as Pigou’s) did not admit the possibility of involuntary unemployment by union wage differentials or minimum wage legislation. The Natural Rate of Unemployment (NRU): There are two conceptually’ separate reasons why the real wage may fail to adjust to the competitive equilibrium value.Firstly, the institutions of the economy may not correspond to those of a competitive economy: information may be costly, there may be traces of monopoly, etc.They have reached the conclusion that if the labour market does not equilibrate, it must be because the price, i.e., the real wage, is set at an inappropriate (and not at the market-clearing) level.The demand for labour originates from the profit-maximising decisions of firms.Consequently, one way that unemployment might be tackled is through policies which attempt to lower the ‘natural’ rate by removing market imperfections.A ‘natural’ rate of unemployment is the level of unemployment where inflation is anticipated.