Question

Present the assumptions of:
i) Classical theory of unemployment
ii) Keynesian theory of unemployment
iii) Insider-Outsider model of unemployment
iv) Efficiency-Wage model of unemployment
Which of the models best addresses the unemployment situation in Nigeria

Answer 1

Assumptions of Classical Theory of (Un)employment revolves around assumptions of Says Law of market, and flexibility of wages, interest and prices. The Says law state that supply creates its own demand. In other words supply of goods creates enough income generate demand for goods equal to its supply. This leaves little to no space for overproduction and unemployment in the economy. Even if unemployment prevails in the short run, in the long run, the economy tends to operate towards levels of full employment.

Assumptions of Keynesian Theory of (Un)employment state that in the short-run factors of production such as capital which determine the levels of employment are constant in the short run and can only vary in the long run. Any changes in the aggregate demand have the strongest effect on the level of output and on the level of employment, and not so much on the price levels. Keynesian theory states that prices and wages are sticky in the short run and high levels of economic expansion and contraction have a greater effect on employment levels which then manipulate price levels. Keynesians argue that due to the sticky prices and wages the economy can be stuck for a considerable amount of time.

Assumptions of Insider-Outsider Model Of (Un)employment sets forth the notion that people who are the insiders, or who are "in" the workforce have the bargaining power over the wages that are set in the labour market than those who are out of the labour force. People in the workforce are more interested in increasing their wages than creating more jobs to increase the workforce. On the other hand, the firms are also interested in dealing with the people on the inside because the cost of replacement can be extortionate.

Assumptions of Efficiency-Wage Model Of (Un)employment hypothesises that employers are likely to pay their employees higher wages than market-clearing levels to reduce costs related to employee turnovers and increasing the productivity and efficiency of workers through incentivization. This model causes market failure as the levels of wages and quantity of labour provided and demanded is higher than the equilibrium level. This model does not necessarily create higher unemployment but leads to market failure in the labour market.

The model that best addresses the unemployment situation in Nigeria is of structural unemployment which could be connected with the insider and outsider model problem. The population of Nigeria that is greatly unemployed is young and they lack employable skills which were not given to them due to the structural problems of the economy. The people on the inside of the workforce aren't taking measures to improve the situation of the workforce and are more concentrated on their maximising the interests of the current workforce.