Keyness theory of involuntary unemployment

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Keyness theory of involuntary unemployment

• How did Keynes change the prevailing conception
  of the economy to account for the existence of
  involuntary unemployment?
• By Thomas Biering and Robin Deutsch

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Involuntary Unemployment

• 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 Chapter IV of General
  Theory

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What does that mean?

• If prices relative to wages rise, there will be
  more people wanting to work than there is demand/
  need for (labour surplus)
• Therefore people will be involuntarily unemployed
  because they are willing and able to work but are
  not employed

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The Theory

• Keynes assumed that full employment would prevent
  a major recession and this should be the primary
  goal of the state.
• He assumed that there may be involuntary
  unemployment if there is no intervention, because
  supply may be greater than demand, unless demand
  is boosted.
• This must be done by the government.

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State Intervention

• Says that state intervention should stimulate
  employment and investment. How?
• By boosting aggregate demand in the economy
• By having a surplus in the trade balance, because
  exports boost demand, thus there is more need for
  supply of goods and higher demand for labour to
  produce these goods

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Criticism of Classical Economics

• Keynes criticises the idea that markets tend
  towards beneficial equilibrium
• Equilibrium could exist despite massive
  unemployment

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Keynes Theory of Employment

• Employment based on 3 principles
• 1.) The marginal propensity to consume (the
  percentage of any increase in income that people
  spend)
• 2.) The marginal efficiency of capital (the rates
  of return on capital)
• 3.) The rate of interest

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How did he change the prevailing conception?

• He added to employment theory, the idea of
  involuntary unemployment
• He changed the theory on the behaviour of labour
  A fall in real wages does not necessarily lead to
  a fall in labour supply for a given money wage
• He altered the mainstream view to one where the
  government can influence the rate of employment