Unemployment - Disequilibrium

The first type of disequilibrium unemployment is called real-wage or neo-Classical unemployment.  Basically, this concept is the same as microeconomic price floors but applied to workers and minimum wages.  A minimum wage, w1, is set above the market-clearing wage, we at quantity q*.  Instead, a minimum wage has been set which guarantees workers a wage above where it would fall if the labor market were left to its own devices.  Thus, there is real wage / neo-Classical unemployment from q1 to q2 at wage w1.  Keynesian economists argue that such minimum wages are needed to protect the most vulnerable in society.  Neo-Classical economists argue there would be no real-wage unemployment without a minimum wage and more people would be working.  Big debate (as per usual with these schools of thought).

The second type of disequilibrium unemployment involves downturns in the economy.  If AD falls from a negative demand shock, AD shifts in causing APL and Y to also fall.  Because output (real GDP) has fallen, less workers are needed to make g/s.  This causes cyclical/demand-deficient/Keynesian unemployment (this new graph above!).  Neo-Classical economists argue that the labor market will go from it's original equilibrium at we, qe to its new equilibrium w2, q2 since workers will accept lower wages.  Keynesians disagree!  They believe there is wage stickiness which means that it's very unlikely workers will accept lower wages due to forces like union power and simple static human behavior and mindsets.  Thus, they believe cyclical unemployment from q1 to q2 will exist at the same original wage rate w1.