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Keynesian (1936) contended that aggregate demand for goods might not be sufficient during economic downturns, resulting in unessential high unemployment and losses of latent output. Keynesian (1936) argued that government policies could increase aggregate demand, leading to increasing economic activities and making unemployment and deflation go down.

A central assumption of Keynesian economics is that, in certain situations, no strong automatic mechanism makes output and employment move to full employment levels. This assumption conflicts with economic approaches that presume a general tendency towards an equilibrium (Keynesian, 1936).

Keynesian (1938) indicated that the decision of wages was quite complex. First, he (1938) argued that it was not real but nominal wages that were set in negotiations between employers and employees. Second, nominal wage cuts might be hard to put into practice due to law and wage contracts.

Also classical economists consented that these exist. They advised canceling minimum wages, unions, and long-term contracts, rising labor-market flexibility. However, to Keynes, people would resist nominal wage reduction, or without unions, until they saw other wages decline and a decline of prices.

Keynesian (1936) also argued that to increase employment, real wages had to decline: nominal wages would have to go down more than prices. However, doing like this would reduce consumer demand so that the aggregate demand for goods would fall. This would in turn reduce business sales revenues and expected profits. Investment in new plants and equipment—perhaps was discouraged by former excesses. Instead of raising business expectations, wage cuts might make matters worse (Keynesian, 1936).

Keynes argued that the main cause of unemployment lay outside the labour market - in the conditions prevailing in the economy as a whole.

That was demand-deficient unemployment and it could only be tacked by policies which affected the economy as a whole. It meant using expansionary fiscal policy to add to aggregate demand.

Fiscal policy is the use of government expenditure and taxation. Expansionary fiscal policy meant that more government spending and lower taxes. Moreover, Keynes preferred more government spending - it was quicker acting and more direct than lowering taxes (Mulhearn, 2009).

Unemployment can arise inside the labour market too. They are frictional unemployment and structural unemployment. Frictional unemployment arises when workers quit their jobs but do not find new ones straight away - it's also called search unemployment. Structural unemployment arises from structural change in dynamic economies - it's also known as mismatch unemployment. As old industries decay, so too can the skills associated with them. Workers released from these industries may take time to develop new skills, or may not be immediately prepared to migrate to other places where there are more vacancies. However, in the Keynesian view, these are relatively minor categories. The Great Depression - or indeed the UK recessions in the early 1980s and early 1990s - cannot be explained by frictional or structural unemployment (Mulhearn, 2009).

New Keynesian Economics 新凯恩斯经济学
New Keynesians assume prices and wages are 'sticky', which means there is no need to adjust to change them in economic condition