Academic Literature

Mass Involontary Unemployment

There is some agreement among macroeconomists that the persistently high unemployment in the late 1970s and beyond was consistent with the economists concept of involuntary unemployment. Involuntary unemployment is a fundamental concept in macroeconomics and indicates that individuals are constrained by the systemic failure of the economy to provide enough jobs and have little power to alter that circumstance and thus gain work.

A significant number of economists consider unemployment to be a voluntary state, chosen by individuals upon the basis of their preferences for “leisure” against work.

The concept of voluntarism comes from the Classical economists (pre 1930s) who denied that there could ever be an enduring state where the system failed to provide enough work relative to the preferences of those who desired to work. They claimed that output (which drives the demand for labour) could never persist at which would be insufficient to generate a job for all those who desired one.

The Great Depression in the 1930s changed the debate because the notion of voluntary unemployment failed to accord with the observed reality. Millions of workers clearly desired to work but were forced onto the unemployment queue because employers were not willing to provide them with jobs. It was clear that the firms had no desire to expand employment at that time because they could not foresee any potential sales for the extra output that might have been produced.

In the 1930s, the British economist John Maynard Keynes realised that the existing body of macroeconomic theory was inadequate for explaining the mass unemployment that persisted throughout the decade as production levels fell in the face of a major slump in overall spending. He thus defined involuntary unemployment in this way:

Men are involuntarily unemployed, if, in the event of a small rise in the price of wage-goods relative to the money-wage, both the aggregate supply of labour willing to work for the current money-wage and the aggregate demand for it at that wage would be greater than the existing volume of employment. (Page 15, General Theory)

That definition will appear to be difficult to understand. It was deliberately designed to challenge the existing British Treasury viewpoint which claimed that the unemployment during the early part of the 1930s was due to the real wage (the purchasing power equivalent of the money wage) being too high relative to productivity.

So Keynes said that if the real wage falls and workers still supply more labour to the increased quantity of jobs offered by the firms then those workers were unemployed against their will – that is, involuntarily unemployed. The essential point that Keynes was aiming to instill into the debate was that mass unemployment of the type he saw in the 1930s was a demand rather than supply phenomenon. That is, it is total spending in the economy that impels firms to employ workers and produce goods and services. A firm will not employ if they cannot sell the goods and services that would be produced.

Building on that concept, Keynes introduced the idea of the unemployment equilibrium – that is, a state where the monetary economy could continue to operate at high levels of unemployment and firms realising their expected sales volumes. He argued that if the economy reaches this type of impasse, the only way out is to reduce unemployment by an injection of government spending, which stimulates demand and provokes firms to increase output and offer more jobs.

The debate between Keynes and the Classical economists in the 1930s has resonated throughout the decades since. In the 1980s and beyond as unemployment persisted at high levels in many nations it was clear that firms wanted to increase output at the current real wage levels but were constrained by the aggregate spending available.

We need to understand how economies became trapped in an unemployment equilibrium long after Keynes first identified the tendency within the capitalist monetary system…

By the way, we (JMM) suggest a new concept, the SIUR:

Surnatural Involuntarily Unemployment Rate =

Actual Mass Unemployment Rate 

Natural rate  

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