In New Classical theory, periods of declining employment - business cycle downturns - may be caused by an unexpected decline in aggregate demand, which leaves workers mistakenly holding out for nominal wages that exceed the new market-clearing level.

George Akerlof

Aggregate Business Caused Classical Cycle Decline Declining Demand Employment Exceed Holding Leaves Level May New Out Periods Theory Unexpected Wages Which Workers

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In the late 1960s, the New Classical economists saw the same weaknesses in the microfoundations of macroeconomics that have motivated me. They hated its lack of rigor. And they sacked it.

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The theory that if wages go up, employment goes down isn't a physical law like F=MA. It's a moral law, like 'Bedtime is 9:00 P.M.'

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Even if the dollar does decline during the coming months, the delays in the response of exports and imports to the more competitive dollar will mean that the increase in aggregate demand from this source may not happen for a year or more.

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