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2.9 Keynes’s Analysis of the Labour Market

We have already seen (section 2.3) that full employment is guaranteed in the

classical model providing that competition prevails in the labour market, and

prices and wages are perfectly flexible (see Figures 2.2 and 2.4). In sharp

contrast, Keynes did not accept that the labour market worked in a way that

would always ensure market clearing. Involuntary unemployment is likely to

be a feature of the labour market if money wages are rigid. But Keynes went

further than this and argued that flexibility of nominal wages would be

unlikely to generate powerful enough forces which could lead the economy

back to full employment. Let us examine each of these cases.