Why is persistent unemployment a possibility in the Keynesian model but NOT in the classical model?

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2026-05-12 09:15

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In the Keynesian model, persistent unemployment is possible because it emphasizes the role of demand in the economy, suggesting that inadequate aggregate demand can lead to prolonged unemployment. This can occur when wages and prices are sticky, preventing the labor market from clearing. In contrast, the classical model assumes that markets, including the labor market, are always in equilibrium due to flexible wages and prices, meaning any unemployment is temporary and self-correcting. Thus, in the classical framework, there should be no persistent unemployment as the economy naturally adjusts to full employment.

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