keynesian, labor, wagesIn The General Theory of Employment, Interest, and Money, Keynes defines three types of unemployment:
He describes involuntary employment as follows:
Men are involuntarily unemployed if, in the event of a small rise in the price of wage-goods relatively 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.
I can barely parse this statement, and I certainly can’t think of concrete examples. Can you explain the concept in 2011 words and provide relevant examples?
An agent is involuntarily unemployed if s/he is willing to work at the prevailing wage rate but can’t find employment. So most typical cases of unemployment you can think of come under involuntary unemployment (the other common type is frictional unemployment, i.e., unemployment attributable to being ‘between jobs’).
Why is there such a huge debate about this? Believe it or not, until recently most prevailing models, being neo-classical in origin, assumed that unemployment is always voluntary. That is, if someone is not working it’s because they do no want to work at the prevailing wage rate. The 2010 winners of the Nobel Prize, Diamond, Mortensen and Pissarides, are commonly credited with fixing these problems by making better employment search models.
In the quotation above, Keynes is probably saying that involuntary unemployment arises because the market takes time to adjust. suppose wage is w and the real wage is w/p. At this wage, some agents are willing to work but can’t find work. Now if p rises, real wage falls, therefore demand for labour rises. This is why you get both surplus demand and supply of labour. As the market adjusts the surplus demand disappears. (Keynes would have contended that the supply of labour would continue to be in excess of the equilibrium level even in the long run though.)
That’s the definition of involuntary unemployment from chapter 2 of the G.T.
Keynes stresses, just a few lines above, that it is but a temporary definition. Involuntary unemployment depends on effective demand and is better explained in chapter 3.
I think it’s hard to understand the quote without the context. Hayes (The Economics of Keynes) explains it well: here Keynes is trying to define involuntary unemployment while remaining in a classical setup. It is an intuitive appeal rather than a proper definition.
Specifically, Keynes just described price stickiness. Workers fight for nominal wages and don’t take paycuts. A signal that there is involuntary unemployment is when inflation goes up ( in the event of a small rise in the price of wage-goods relatively to the money-wage) but even more people are willing to work than before.
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