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Macroeconomic Stabilisation Theory and Policy

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The level of economic stability in any economy depends on both macro and microeconomic variables. Within the scope of the macroeconomic tools various, markets are deemed to be influential. These include the money market, the goods/commodity market, the labour market, capital and also foreign market. For stabilisation purpose, all the markets should be at equilibrium both in the supply and demand sides.

The labour market remains a fundamental market that models the nature and status   of economic stability. Labour market is the general portfolio within the market which figures the broad scope of the demand and the supply of labour. Within the economy, labour interacts with the firms to provide the relevant implication to each other. Labour within the economy is provided by the households. It is paid in terms of wages and other remunerations.

Either, the firms produces consumption goods and also services for use by the household. Consequently, stability in the labour market provides a stake in defining the levels of economic functionality. This is basically through shaping the nature and scope of unemployment which is a macroeconomic variable. Unemployment is also determined by the existing levels of equilibrium between labour demand and supply.

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Economically, the aggregate labour market is cleared at the economic disposition when the level of labour demand and supply are deemed equal.  Broadly, the aspect of the demand and the supply of labour for such market clearing are defined in terms of the market level of wages. Wage is the price levied for the supply and demand of labour.

From the two sides, the household is deemed to be the supplying component of the labour service while the firms are the demand function of labour. The aspect of market clearing therefore tries to establish the most functional level of wage rate which makes both the demand and supply of labour equal within the labour market. Therefore, the household and firms seldom rely on the levels of the market wage rate as benchmarks for support with which the labour substitution can be made. (Ron, Philip, 2002, p.90)

The basic concept is however the determination of the most adequate levels of market wage rates which creates market clearing. For stability purpose, the level of labour supply and labour demand should always be at equilibrium. This wage rate is called market clearing wage  rate which is used by the hidden  hand of the market for clearing  the excess levels and also deficits in the demand and supply of labour.

Market clearing in labour market is described by the concept of the basic economic law of the labour demand and supply.  This law states that, with all other factors being at a constant, the increase in wage rate leads to an increase in labour supply by the household in the short run. However, a decrease in wage rate brings a   disincentive for labour supply by the household which ultimately leads to lower levels of labour supply. The feasibility in the levels of labour supply and demand is fundamental in relating the existing relationship between employment and unemployment as a key factor in defining the stability scope of the economy.

A low level of unemployment is important in describing the level with which the economy stabilises. Generally, the market clearing intercept in the labour market is provided by the equilibrium functionality between the labour supply and the demand. This is to mean that, the exact level of labour force supplied by the household is exactly equal with what is needed by the firms  within the economy. The functional aspect of wages determines the basic scope with which efficiency can be explained in the labour market. The basic levels of inequality between the supply and demand of such labour is what brings the idea of inefficiencies allied to unemployment. (Michael, 2002, p. 103)

Economically in the commodity market, firms are the suppliers of services and goods to the household (consumers). However, in the labour market, these firms seldom becomes the consumers of the labour force. The need for labour force by the firms is for  making various  scope of products. The demand for labour in the different firm functions is dependent on the level of wages in the labour market. The clearing state for labour is determined by the related cost of the same which determines the related level of supply and demand. Consequently, the cost of labour in the market is what yields market wage rate.

The level of supply and demand for labour is therefore a function of the wage rate. The desire by the firms in purchasing labour at the existing levels of market wage rates goes up to the point where both the wage rate and the marginal revenue product are equal. The marginal revenue product of labour would thus signify the level with which an additional unit of labour would generate to the firm’s revenue. Equilibrium levels in the labour market is what provides the market labour clearance.

The equilibrium level of market labour is arrived   at when the aggregate levels of both demand and supply are equal. Generally, aggregate labour supply denotes the sum total of all the labour supplying units/ personnel in the market. Elsewhere, aggregate demand is what is captured by the sum total of all labour demand units by the firms in the market. For equilibrium, both the levels in supply and demand should equate one another. Equilibrium is denoted by the interception capacity of the labour demand and supply curves. (Gilles, 2000, p.87)

The clearing tool in the labour market is operational within two scopes. The market could be unrestricted where the supply and demand levels are freely volatile to be determined by the basic circumstances in the market. Elsewhere, the market could be restricted to certain level of wage rate which therefore helps to control the wage rate from going below or above the specific levels of wage rate.

The unrestricted market function implies that the level of market wage rate is determined by the scope of labour supply and labour demand. This is through the use of the basic law of demand and supply of labour by household and firms. When the wage rate is high, the level of labour supply is also high. However, when the wage rate is low, the supply of the wages is also low. With wages being restricted, the labour supply and demand is restricted by both wage ceilings and wage floors. Wage ceiling implies the highest level of wages which should not be surpassed above (it is made to protect the firms from  exploitation by the labour suppliers).

Elsewhere, price floor is the lowest level of wage rate which should not be paid below it.  This is made to protect the labour suppliers from the basic exploitation by the firms through very low wage set up. The stability in the labour market plays an important role in the general commodity market, where the supply and demand for goods is depended on the price level within the market. (Andres, 1988, p.78)

Generally, the level of consumption (both goods and services within the market is determined by the level of the income held by the households). Ideally, the same income is gotten through the sale of their labour services to the firms. Either, the supply of such goods and services by the firms is determined by many factors  which include the level  of labour  which is a basic  factor of production.

Consequently, equilibrium in the labour market is a passive tool for providing  support  for a strongly functional  commodity market.  Through the sale of their labour services, the households get money which they use in purchasing their consumption requirements from the firms. Elsewhere, firms use the labour force from the workers to produce goods and services for use by the households.

Therefore, the equilibrium state between the aggregate labour demand and aggregate labour supply is arrived at, at the point of intersection between both curves. Such an intersection point is important in claiming the level of the equilibrium level of wage rate as well as determining the level of economic state of employment. Within the competitive market  (unrestricted), the profitability level of the firms is determined by the level with which such firms hires labour until it reaches the level of equality between marginal cost of labour and marginal revenue product  of labour . (Ben, 1998, p.46)

Conventionally therefore, market  clearing in the labour  markets is achieved by the  condition when  the level  of quantity demanded is equal to the quantity supplied. This is important in safeguarding against any form of shortages or even surplus quantities in the market. The stability status of the labour market provides an adequate status for safeguarding the level and implication of the rates of unemployment  in the economy.

Generally, macroeconomic conception dictates that high labour supply than its demand produces labour surplus in the labour market. This is a basic indication towards a higher rate of unemployment within the economy. Elsewhere, high demand for labour than its supply causes labour deficits. This substantially causes an increasingly high level of unemployment. Altogether, a stable state between both labour demand and  supply  remains  fundamental  indication  in furnishing  the basic threshold  that determines  the scope of  unemployment .

As a broad  macroeconomic variable, the speculation towards  reducing  the general  impact  in unemployment also captures stability  in other operating p[parameters between  the labour market. Generally therefore, stability in the  labour market provides  a ground work condition for its market clearing where the general demand supply are adequately at equilibrium. As a rule for such market clearing its fundamentals are basically projected by the capacity with which the market demand and supply of labour  would fundamentally yield substantially a stable position which limits the impacts of a high levels  of unemployment in the market. (Frank, 2006, pp.84)

The support for market clearing in labour  market is expanded by the  Keynesian neoclassical model on a labour . He proposed that equality between aggregate supply and aggregate demand for labour would act to provide a groundwork favourable environment towards low states of unemployment. At the equilibrium level is the equilibrium amount of wage rate which helps to provide a high standard for rationality in reducing the level of unemployment. The equilibrium level of wage rate acts as a supportive tool for the implementation protocol where the level of supply is deemed rationally compatible with the theoretical wage levels.

Elsewhere, the levels of demand would also be equal to the level of wages. As a rule therefore, the level of equilibrium within the labour market plays a fundamental attribute in a rationalising for a stable state of commodity market. (Frank, 2006, pp.98)  Also, since the labour market is one of the economic markets, its stability also provides a condition for a  strong defence towards a stable  state  of economy  where labour deficits  and surpluses would not be available hence a strong sense in the economic stability.

Generally therefore, the basic concept behind labour market clearing is the basic threshold with which the level of quantities of labour supplied is equal with what is demanded. This provides a substantial position for strengthening the level of economic stability within the general economy.

As an important macroeconomic tool, a stable state of employment within the economy is provided by the degree of compatibility between the labour market. High levels of unemployment cause instability in other facets of economic growth where low levels of consumption is deemed the basic implication of high unemployment. Therefore, great importance should be attached in the state of the relationship between the demand and supply of labour for a greater scope of economic functionality.


Andres, D. (1988) Real Wages and Employment: Keynes, Monetarism, and the Labor Market. London, Routledge, pp.78

Ben, F. (1998) Labor Market Theory: A Constructive Reassessment. London, Routledge,pp.46

Frank, M. (2006) Towards Labor Market Liberalisation. London Routledge, pp. 84,98

Gilles, S. (2000) The Political Economy of Labor Market Institutions. Oxford, Oxford University Press, pp.87

Michael, H. (2002) Labor Market Planning Revisited. Palgrave, Macmillan, pp.103

Ron, M & Philip, M. (2002) Geographies of Labor Market Inequality. London,

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