The classical theory
The classical economists believed in the existence of full employment in the economy.
To them, full employment was a normal situation and any deviation from this regarded as something abnormal.
According to Pigou, the tendency of the economic system is to automatically provide full employment in the labour market when the demand and supply of labour are equal.
Unemployment results from the rigidity in the wage structure and interference in the working of free market system in the form of trade union legislation, minimum wage legislation etc.
Full employment exists “when everybody who at the running rate of wages wishes to be employed.”
Those who are not prepared to work at the existing wage rate are not unemployed because they are voluntarily unemployed.
Thus full employment is a situation where there is no possibility of involuntary unemployment in the sense that people are prepared to work at the current wage rate but they do not find work.
The basis of the classical theory is Say’s Law of Markets which was carried forward by classical economists like Marshall and Pigou.
They explained the determination of output and employment divided into individual markets for labour, goods and money.
Each market involves a built-in equilibrium mechanism to ensure full employment in the economy.