What Keynes Meant by "Involuntary Unemployment"
Robert Waldmann
Mark Thoma linked to a post at my personal blog about the history of economic thought 101, what did Keynes write in “The General Theory of Employment, Interest and Money.” So I guess my next effort at humiliatingly elementary history of thought should be here. After the jump.
When contemporary economists speak of “involuntary unemployment” we mean that there are three agents, a worker, an unemployed person and an employer, that the unemployed person would be glad to work for a wage lower (perhaps slightly lower) than the one paid to the worker and the employer would be glad to employ the unemployed person at that lower wage (perhaps laying of the worker). With this definition, involuntary unemployment can occur because labor unions force employers to pay a high wage even if there are people who would accept a lower wage. This case is an example of the “Insider/outsider” model of involuntary unemployment.
Keynes meant something else. He would have called that unemployment voluntary because “labour as a whole” or the workers or the working class were unwilling to supply labour at a lower wage. Not being Scott Sumner and not being willing to accuse Paul Krugman of intellectual dishonesty under the assumption that the links he puts in his posts ar purely decorative, I shall click Krugman’s link.
Here Keynes is explaining what he calls “the classical theory.”
the fact that the population generally is seldom doing as much work as it would like to do on the basis of the current wage? For, admittedly, more labour would, as a rule, be forthcoming at the existing money-wage if it were demanded. The classical school reconcile this phenomenon with their second postulate by arguing that, while the demand for labour at the existing money-wage may be satisfied before everyone willing to work at this wage is employed, this situation is due to an open or tacit agreement amongst workers not to work for less, and that if labour as a whole would agree to a reduction of money-wages more employment would be forthcoming. If this is the case, such unemployment, though apparently involuntary, is not strictly so, and ought to be included under the above category of ‘voluntary’ unemployment due to the effects of collective bargaining, etc.
So to Keynes unemployment due to nominal wage rigidity and unemployment due to collective bargaining were ‘voluntary’ unemployment. The quotes are not scare quotes. He is quoting other economists (principally Pigou) and he uses the word with that sense throughout The General Theory of Employment, Interest, and Money.
This means that self declared “New Keynesians” would be called “classicals” by Keynes.
Keynes argued that there can be cases in which “labour as a whole” can’t obtain more employment by agreeing to a reduction of money-wages (what we call nominal wages). Basically he argues (assumes really) that firms will cut prices if workers accept lower wages (he definitely assumed flexible prices and basically pretty much assumed perfect competition in product markets). So the immediate effect of the lower nominal wage would be the same real wage and a lower price level. The effect of this is equivalent to the effect of an increase in the money supply. The increase of the money supply won’t cause increased employment if the economy is in a liquidity trap.
So far Keynes has presented a general theory which really isn’t all that much more general. He would just say that the arguments which he called classical require the qualifier “so long as the economy isn’t in a liquidity trap, that is so long as safe short term interest rates aren’t essentially zero” and then consider the other case.
This isn’t the end of the story. For one thing, if a small open economy is on the gold standard, the money supply can automatically shrink when the price level falls so the real money supply stays the same (oddly exactly this point was very much stressed by Sumner once). For another, even without a gold standard a central bank which targets nominal interest rates will respond to the reduction of the price level by reducing the money supply. This can imply that downward wage flexibility causes reduced employment as it causes deflation which means that the constant nominal interest rate corresponds to a higher real interest rate and lower investment for given GDP growth.
However, it shows reckless disregard for the truth to claim that what Keynes wrote about the classicals was dishonest, because those classicals were essentially New Keynesians. It is equally reckless to say that what Krugman wrote “the other side in this debate generally adheres, more or less, to something like what Keynes called the “classical theory” of employment, in which employment and output are basically determined by the supply side. ” is dishonest.
He specified that he meant what Keynes called “the classical theory” making it clear to anyone with normal linguistic skills (including Gricean maxims) that other people use the phrase with another meaning. And that and gave a link which no one could be expected to actually click since Krugman has only occasionally stressed that the links are not decorative (indeed maybe only once).
Now everyone is sloppy sometimes. But Sumner was reckless and sloppy when accusing others of intellectual integrity and has earned some quiet time.
Sloppy and careless is nothing new for Sumner.
http://jazzbumpa.blogspot.com/2010/06/money-illusion-delusion.html
It appears that Sumner is a deeply disturbed human being, and his Krugman deragement syndrom is only one manifestation of it.
Apparently, he believes that the labor union and commie hating Nazis were actually socialists. And then there’s this.
http://www.themoneyillusion.com/?p=7116
I can no longer take this crank seriously
Argghh!
JzB
This is very good.
Leaving Sumner aside, I enjoyed the point that the New Keynesians are much more classical than they are Keynesian. Quiggin has had a conversion experience. Both DeLong and Krugman admit to going back to Keynes, although Krugman I think he focuses too much on the zero bound (Keynes did not have two models). Thoma remains a little more resistant.
Given that Krugman called himself a “new Keynesian” today in his blog, I’m really going to enjoy responding to this post. I always knew Krugman wa sa self-hater.
“This means that self declared “New Keynesians” would be called “classicals” by Keynes”
They are classicals.
I should also mention Nick Rowe, who has had some good posts
http://worthwhile.typepad.com/worthwhile_canadian_initi/2010/09/hayek-keynes-hicks-money-and-new-keynesian-macroeconomics.html#more
“There’s sensible rational expectations, then there’s silly rational expectations, and then there’s the rational expectations that would be needed to make New Keynesian macroeconomics work.
New Keynesian macroeconomics ignores Hayek, Keynes, and Hicks. Big deal, you might say. OK, how about this: New Keynesian macroeconomics assumes that Say’s Law is expected to hold at all future periods.” …NR
“So to Keynes unemployment due to nominal wage rigidity and unemployment due to collective bargaining were ‘voluntary’ unemployment.”
I think this is overstatement. What Keynes is saying here is that if you stick to the second postulate of the classical school, you are forced to bring in such factors as nominal wage rigidity, collective bargaining, etc, in order to make extant unemployment ‘voluntary’.
Keynes defines involuntary unemployment 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.”
That is, if real wage fell a bit and employment increased, that was involuntary unemployment. This definiton does not question how the real wage discrepancy from equilibrium occurred in the first place.
“But Sumner was reckless and sloppy when accusing others of intellectual integrity…”
He *accuses* others of “intellectual integrity”?! This post is so poorly written I can’ figure out what is being said.