Classical unemployment occurs when real wages are kept above the market clearing wage rate, leading to a surplus of labour supplied.
Classical unemployment is sometimes known as real wage unemployment because it refers to real wages being too high.
Diagram Showing Classical Unemployment
Classical Unemployment = Q3-Q2.
In a free market, the quantity of labour would be Q1.
Classical economists stress the importance of this type of unemployment. They argue that if wages were more flexible, then most unemployment could be solved.
However, Keynesian economists argue it is not as straightforward. They argue the problem may be a lack of aggregate demand in the economy. For example, if wages are cut, it could lead to a further fall in AD, as workers have lower wages. In this case, cutting wages may be ineffective in solving classical unemployment.