Which economic framework includes the idea that labor markets do not always clear due to wage rigidities?

• A. New Classical
• B. Keynesian
• C. Classical
• D. Monetarist

Answer: (B)

In the short run, wages and prices can be slow to adjust, a idea that sits at the heart of Keynesian analysis. When wages are sticky—due to contracts, norms, minimums, or efficiency concerns—they don’t fall quickly if demand for goods and services drops. That means firms can’t clear the labor market simply by lowering wages, so unemployment can persist even when there are workers available. This leads to the notion that labor markets do not automatically clear, and overall activity can be below full employment unless aggregate demand is stimulated.

Keynesian thinking foregrounds this wage rigidity as the reason for unemployment and for why government policy can influence output and employment in the short run. In contrast, classical and new classical frameworks assume wages and prices adjust quickly to equate supply and demand, so the labor market clears. Monetarists focus on the role of money and policy rules rather than persistent wage rigidity as the primary mechanism behind unemployment.