Classical Theory of Unemployment

The classical view of unemployment states that in the long run, a perfectly competitive market will fix itself; business cycles are only temporary. It will achieve full employment if wages and prices are flexible. Unemployment is caused by higher wages because at higher wages quantity supplied is greater than quantity demanded, thus creating a surplus of workers. A laissez faire market is intrinsically stable.
D↓ → P↓ → Interest Rate↓ → more loans → D↑
Unemployment↑ → Job Competition↑ → Wages↓ →Unemployment[1]


[1] Stephanie Powers, “Econ 101 Lecture Notes,” Accessed April 16, 2012.