The fallacy of the neoclassicals is their tenet that total employment, though hit by shocks, can be said always to be heading back to some normal level.
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In New Classical theory, periods of declining employment - business cycle downturns - may be caused by an unexpected decline in aggregate demand, which leaves workers mistakenly holding out for nominal wages that exceed the new market-clearing level.
Economists of a classical bent lay a large part of the decline of employment, and thus lagging output, to a contraction of labour supply.
There are always, of course, job losses of a cyclical nature in a recession.
In addition to joblessness, of course, by the working of supply and demand, when you have a larger number of people unemployed, wages do not rise at the normal level, so that we had last year a drop in real wages.
In my view, if you have one in 10 unemployed - something is wrong with the economy whether you call it recession or not.
Even when America's economy has been by all measures healthy and the unemployment rate low, some businesses suffer or fail and lay off workers. But nearly always, a simultaneous and even greater burst of new jobs has been created to offset the jobs lost - millions of new jobs every year.
The shock of unemployment becomes a pathology in its own right.
The Keynesian prescription for unemployment rests on the persistence of a 'money illusion' among workers, i.e., on the belief that while, through unions and government, they will keep money wage rates from falling, they will also accept a fall in real wage rates via higher prices.
The Keynesian belief that 'demand' is always at the root of underemployment and slow growth is a fallacy.
The rise or fall of wages is common to all states of society, whether it be the stationary, the advancing, or the retrograde state.