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demand curve depends on the slope of the new production function at each level of L.  This, in turn, depends on the nature of the technological change: labour saving, capital saving or skill-intensive.  In the case depicted above in figure 14.1 (b), assuming that labour supply does not shift, equilibrium will be restored moving from A to B, the new point being consistent with higher wages and more employment.

To provide a general framework of the effects of technology on labour, a few observations are needed.

i) Much technological progress has been labour-displacing.  New machines have replaced workers in onerous and boring jobs, increasing the standard of living of a population.

ii) As a consequence, new goods and services have been demanded and new jobs have been created in different and new sectors.

iii) Serious 'mismatch' and adjustment problems can arise in the short period because unskilled workers are not able to fill positions requiring highly-skilled labour.

iv) Education and professional training are therefore necessary to adapt labour supply to the new labour demand.

Q3  'Unemployment is high because wages are too high and employees are pricing themselves out of a job' (business economist).

'Reducing pay and employing people in low-wage jobs will depress national spending and make unemployment even worse' (trade union official).

Evaluate these two opposing view of the unemployment problem.

These two statements are representative of the supply-side and the demand-side approaches to unemployment respectively.  The former is derived from the classical labour market analysis and summarises the orthodox position on unemployment advocated generally by business confederations, liberal parties and central banks.  The latter is of Keynesian derivation and is closer politically to workers' confederations and social democratic parties.

According to the supply-side approach, the labour market always clears at point C, where demand equals supply (figure 14.2 - a).  If unemployment exists, the reason is the wage rate being too high. If, due to rigidities in the labour market, the real wage (w/p)1 was higher than the market-clearing real wage (w/p)0, unemployment would arise, the extent of which would correspond to section AB in the graph.  If market mechanisms were allowed to work, excess supply at (w/p)1 would drive down the real wage until a new equilibrium would be reached at point C: if workers accepted a lower real wage (w/p)0 unemployment could be avoided. In this way, producing something, even at low productivity, is better than being unemployed and producing nothing. Pay moderation and flexibility in the labour market are the keys to resolve unemployment.

The second approach is based on the Keynesian theory.  This model gives more emphasis on demand-side issues.  Its rationale can be explained as follows: suppose


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