Theoretical Controversies in Macroeconomics

Earlier in this chapter, I remarked that every behavioral in macroeconomics is subject to dispute. Here, we examine two of the major issues.

Why is there unemployment?

In theory, the market for labor is like any market. There is supply, which comes from people willing to work. There is demand, which comes from firms with needs for work. And there is a price, the wage rate, which should clear the market.

In a typical market that is characterized by supply, demand, and a price, economic theory says that the price will adjust to "clear" the market, meaning that there is neither excess supply nor excess demand. One of the most elementary fallacies of non-economists is to predict that a "shortage" is going to last for many years, because this will not hap