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demand deficient unemployment

S

salonijain

Member
The defn says that- it is the unemployment caused due to fall in aggregate demand "with no corresponding fall in the real wage rate" . What does the text in the inverted commas mean with context to the definition?
 
A fall in aggregate demand leads to a fall in the aggregate demand for labour (ADL), so the ADL curve shifts to the left.

If real wages are allowed to fall, then the labour market would reach find a new equilibrium (downwards and to the left on the diagram).

However, if real wages are not allowed to fall, then at that wage rate, the aggregate supply of labour (ASL) will exceed ADL. ASL minus ADL at that wage rate represents demand-deficient unemployment. It's like having a "surplus" of goods, but we're talking about labour rather than goods.
 
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