ECS4861
Assignment 3
Due 13 August 2025
, Department of Economics University of South Africa
ECS4861– Advanced Macroeconomics
Assignment 3
Due: 13 August 2025 @ 23H00 Marks: 100
Title: Are Wage and Price Rigidities Necessary for Explaining Involuntary
Unemployment in Keynesian Thought?
1. Introduction
The issue of involuntary unemployment remains a defining concern in macroeconomic
theory, especially within the Keynesian framework. Unlike classical and neoclassical
economics, where markets are assumed to be clear and unemployment is typically
voluntary, Keynesian economics posits that involuntary unemployment can persist even
in the absence of market imperfections. Central to this theory is the concept of wage
and price rigidities. The assertion that such rigidities are necessary to explain
involuntary unemployment is foundational to Keynes's General Theory (1936), and it
continues to play a significant role in both Orthodox Keynesianism and New Keynesian
thought. This essay critically evaluates the necessity of these rigidities in explaining
involuntary unemployment across three key paradigms: Keynes's original theory,
Orthodox Keynesian economics, and New Keynesian economics. It concludes that
while wage and price rigidities are crucial for operationalising these theories, they are
not the only mechanisms responsible for persistent unemployment, particularly when
broader macroeconomic dynamics such as aggregate demand, expectations, and
coordination failures are considered.
2. Involuntary Unemployment and the Classical Assumption
Assignment 3
Due 13 August 2025
, Department of Economics University of South Africa
ECS4861– Advanced Macroeconomics
Assignment 3
Due: 13 August 2025 @ 23H00 Marks: 100
Title: Are Wage and Price Rigidities Necessary for Explaining Involuntary
Unemployment in Keynesian Thought?
1. Introduction
The issue of involuntary unemployment remains a defining concern in macroeconomic
theory, especially within the Keynesian framework. Unlike classical and neoclassical
economics, where markets are assumed to be clear and unemployment is typically
voluntary, Keynesian economics posits that involuntary unemployment can persist even
in the absence of market imperfections. Central to this theory is the concept of wage
and price rigidities. The assertion that such rigidities are necessary to explain
involuntary unemployment is foundational to Keynes's General Theory (1936), and it
continues to play a significant role in both Orthodox Keynesianism and New Keynesian
thought. This essay critically evaluates the necessity of these rigidities in explaining
involuntary unemployment across three key paradigms: Keynes's original theory,
Orthodox Keynesian economics, and New Keynesian economics. It concludes that
while wage and price rigidities are crucial for operationalising these theories, they are
not the only mechanisms responsible for persistent unemployment, particularly when
broader macroeconomic dynamics such as aggregate demand, expectations, and
coordination failures are considered.
2. Involuntary Unemployment and the Classical Assumption
