A Neoclassical Perspective of The Level of Unemployment in China

Even when disequilibrium arises, with some level of unemployment, it is possible to reestablish the equilibrium by lowering the wages. This naturally leads to a rise in labor demand, which resets the initial equilibrium (Bos 2012). For instance, the rate of unemployment in China has reduced in recent years to just over 4%. However, the high rates of unemployment have led to reduction in wages and in the event that employees demand higher wages, there are many more people who will take the available jobs. Wages in other Asian nations earn up to ten times more than the people working in China. This has led to increased profit margins and attracted inward foreign direct investment as more foreign companies start operations in China (Zhang, Fan & Haan 2010). Cheng (2013) provides that capital accumulation in form of new factories, capital assets, communication systems and manufacturing machinery contributed to economic growth in China. Nevertheless, workers in the country were also important in ensuring a sharp, sustained increase in productivity, which was the driving force behind the economic boom.

The gains made in productivity from 1979 to 1994 accounted for more than 42% of the growth in China and by the early 1990s it had overtaken capital as the most significant source of the growth. Equilibrium is also attained in case of inequalities between the levels of savings and investments. Reducing the weight of investments in total available incomes minimizes the demand for money and contributes indirectly, given the intention to stimulate it, to a reduction of the interest rate, therefore becoming attractive for any potential investors who would establish the market equilibrium. Neoclassic perspective takes over the basic elements of the classical theory but offers aspects that are specific to it. This includes the new vision concerned with the value of goods that is determined based on the utility it generates and perceived at the level of the consumer (Cornelia Mitran & Mihai Ipate 2014). Neoclassic perspective also popularizes the marginal concept, which provides that decisions made by economic actors are based on margins. For instance, an organisation acquires a new member of staff based on the expected rise in profits that the new worker will bring. Therefore, the neo-classical perspective differs from classical theory in that it provides an explanation of how essential goods such as food products can be cheap while luxurious items are expensive (Coussy 2005).