Introduction:

The classical economist believed in the existence of full employment in the economy. To them full employment was a normal situation and any deviation from this regard as something abnormal. According to Pigou the propensity of the economic system is to provide full employment in the labor market when the demand and supply of labor are equal. Full employment exist when everyone who are willing to work at running rate of wages. But those who are not prepared to work at 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 original sense the people who are prepared to work at the current wage rate but they do not find work. They are called as unemployed. Among all Classical theory of employment is familiar.

Assumption of the law:

• There is the existence of full employment with inflation.
• There is a laissez faire policy in the economy, means without government interference.
• It is a closed economy without foreign trade.
• There is a perfect competition in labor and product markets.
• Labor is homogeneous.
• The quantity of money is given and money is only the medium of exchange.
• Wages and prices are perfectly flexible.
• Capital stock and technical knowledge are given.
• The law of diminishing return operates in production.
• It assumes long run.

 Given this assumption the determination of output and employment in the classical theory occurs labour goods and money market in the economy.

Classical Theory:

Say’s law of market is the core of the classical theory of employment and early 19th century French economist J. B. Say said supply creates its own demand, therefore there cannot be general over production and the problem of unemployment in the economy. If there is general over production in the economy then some labors may be asked to leave their jobs the problem of unemployment arises in the economy in the short run and in the long run, the economy will automatically tend towards full employment and demand and supply of goods become equal when a producer produces goods and pays wages  to workers, the workers in turn buy those goods in the  market thus the very act of supplying goods implies a demand for them it is in this way that supply create its own demand. The says law depends on some rules. those are

• Determination of output and employment: In the classical theory output and employment are determined by the production function and the demand for labor and the supply of labor in the economy.
• Labor market equilibrium: In the labor market demand for labor and supply of labor determine the level of output and employment, the classical economist regards the demand for labor as the function of the real wage rate the supply of labor also depends on the real wages rate.
• Wage price flexibility: The classical economist believes that there was always full employment in the economy. This argument is based on assumption that there is a direct and proportional relation between money wages and real wages when money wages are reduced they lead to reduction in the cost of production and consequently to the lower prices of product. When prices fall, demand for product will increase and sales will be pushed up increase sales will necessity employment of more labor and ultimately full employment will be attend.
• Goods market equilibrium: The goods market is in equilibrium when savings investment. At that of time total demand equal total supply and the economies in a state of full employment. According to the classical economist what is not spent on investment thus turns in to saving, must equal investment if there is any difference arise between the two the equality is maintained through the functioning of rate of interest. To them both saving and investment are the function of the interest rate.
• Money market equilibrium: The money market equilibrium in the classical theory is based on the quantity theory of money which states that the general price level in the country depends on the supply of economy.

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