The Classical economists believed in the existence of full employment in the economy.According to Pigou,the tendency of the economic system is to automatically provide full employment in the labour market when the demand and supply of labour are equal.The main postulates of the classical economics are follows,

i)There is always full employment in the economy

ii)The economy is always in the state of equilibrium

iii) The classical postulates of full employment and equlibrium are based on the assumption that the economy works on the principals of Laissez - faire.

iv) The classical economists treated money only as a medium of exchange.It doesnot play any significant role in determining the output and employment.

According to the classical theory of employment,equilibrium of the labour market determines the level of employment and this determines the national output.The level of employment is determined by the labour supply and labour demand functions.In fact,both employment and wage rate are determined at the point of intersection between labour supply and labour demand curves.

The classical economists regard the demand for labour as the function of real wage rate, DL = f ( W/P),where DL = demand for labour,W = wage rate and P = price level.Dividing wage rate (W) by price level (P),we get the real wage rate(W/P).The demand for labour is a decreasing function of the real wage rate.It is reducing the real wage rate that more workers can be employed.

The supply of labour is also a function of real wages.The supply of labour increases with any increase in the real wage rate.As is widely known,this relationship holds only till the point of work-leisure trade-off.Beyond the trade - off point,the relationship between work and leisure turns inverse,and the labour supply curve bends backward.However,the labour supply function assumes a positive relationship between real wages and labour supply and is written as

SL= f(W/P),where SL is labour supply and W/p is the real wage

The determination of labour market equilibrium is shown in the figure below,

Here downward sloping DLis the demand curve for labour and upward sloping  SLis the supply curve.When the DLand SL curves intersect at point A,the full employment level Lis determined at the equilibrium real wage rate .W.

Supply curve of labour is an upward sloping one as shown in the figure because as we said earlier it is an increasing function of the real wage rate.It is by increasing the real wage rate that more workers can be employed.An important feature of the classical model is that factors operating on the supply side of the market determine the level of employment and output.

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