Question

Compare and contrast the neoclassical and Keynesian approaches to regional labor markets. Be sure to consider the likely consequences in each model of a wage reduction in a region with unemployment.

Answer 1

According to neoclassical approach, labor markets are driven by supply demand although there is wage differential and each worker earns marginal product of labor. This model approaches law of diminishing returns. Hence wage prices are flexible.

On contrary Keynesian approach suggested there is no wage price differential and there is only rigid price and cannot go below certain price and economy can never return to full employment.

Hence if recession strikes wages naturally come down due to high unemployment. Hence by neoclassical approach price wages are flexible and can return to equilibrium price level or can even go down further. However as per Keynesian approach prices do come down and stay fixed beyond which it cannot go down.