Macroeconomic Stabilisation Theory and Policy

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Macroeconomic Stabilisation Theory and Policy

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

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 ,

.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...