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Thursday, May 16, 2013

The Essence of Post Keynesian Theory of Unemployment

Here it is in one paragraph:
“It is hardly necessary to say that Post Keynesians reject the ‘old classical’, ‘Bastard Keynesian’ and ‘New Keynesian’ argument that unemployment is due to the existence of a real wage above the equilibrium or ‘market clearing’ level owing to the trade union or government interference in the operation of the free market for labour. They also dismiss the ‘New Classical’ notion that unemployment is the (voluntary) result of intertemporal income-leisure choices by individual workers. As was demonstrated above, neither claim is supported by micro foundations; and neither has any macro foundation whatsoever. A Post Keynesian theory of unemployment would instead start from the proposition that in aggregate the level of employment depends on the level of output, which is itself determined by aggregate demand and therefore heavily influenced by macroeconomic policy. Unemployment is simply the difference between the level of employment and the aggregate supply of labour, which may – as explained earlier – safely be regarded as invariant in the short run with respect to the real wage, but variable with respect to the number of job opportunities.” (King 2002: 84).
In short, it is, above all, aggregate demand that drives output and the level of employment. The existence of vast and important fixprice markets in any modern capitalist economy means extra demand generally increases output and employment. The inducement to invest is obviously an important factor.

The level of employment of labour is more than just a simple function of labour supply and demand curves, as in neoclassical theory, where demand is the marginal revenue product of the labour factor (Lavoie 1992: 219) and zero unemployment means a clearing of the labour market (Davidson 2011: 202).

In fact, the demand for and supply of labour are not “well behaved” in a neoclassical sense (Lavoie 1992: 217). In aggregate terms, “one should not expect to find a continuous negative relationship between the demand for labour and the aggregate real wage” (Lavoie 1992: 217). Although excessive wage growth does induce inflation, wages in real world market economies do not need to be, and normally are not, market-clearing wages, and economies can have high employment, strong real output growth and productivity growth without them.

Another fundamental insight is that work does not necessarily have to “carry disutility” (Lavoie 1992: 218). Work can be rewarding, enjoyable and satisfying to some people in certain occupations (Lavoie 1992: 218).


BIBLIOGRAPHY
Davidson, Paul. 2011. Post Keynesian Macroeconomic Theory: Foundation for Successful Economic Policies for the Twenty-First Century (2nd edn). Edward Elgar Publishing, Cheltenham.

King, J. E. 2002. “Some Elements of a Post Keynesian Labour Economics,” in Sheila C. Dow and John Hillard (eds.), Keynes, Uncertainty and the Global Economy. Beyond Keynes, Volume Two. E. Elgar, Cheltenham, Northampton, MA. 68-87.

Lavoie, Marc. 1992. Foundations of Post-Keynesian Economic Analysis. Edward Elgar Publishing, Aldershot, UK.

Pheby, John. 1989. New Directions in Post-Keynesian Economics. Edward Elgar, Aldershot, England.

5 comments:

  1. King says:

    "It is hardly necessary to say that Post Keynesians reject the ‘old classical’, ‘Bastard Keynesian’ and ‘New Keynesian’ argument that unemployment is due to the existence of a real wage above the equilibrium or ‘market clearing’ level"

    and then later

    "A Post Keynesian theory of unemployment would instead start from the proposition that in aggregate the level of employment depends on the level of output, which is itself determined by aggregate demand"

    Spending out of wages will clearly make-up a large part of AD. Surely there will be some situations where a fall in wages will lead to a rise in AD (and greater employment)?

    For example: Workers spend 90% of their wages on output. a 20% wage cut leads to workers instead spending 95% on output. With the higher MPC shouldn't employment increase ?

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    Replies
    1. If the full amount withheld from wages is spent as investment, then what you're proposing is not impossible (but nor is it guaranteed, depending on factors like the capital intensity of the goods purchased). But this presents a new countervailing tendency: increasing employment, ceteris paribus, means more competition for each unit of labor — making it less likely a worker would even take that job (or stay there) at a reduced wage.

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    2. Rob,

      I believe that in your example aggregate demand actually falls: if C=W*MPC, then C'=0.8*(0.95/0.9)*C=0.84*C. MPC is only one side of the medal...

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    3. Well, C for those workers already employed will falls (good point, I should have chosen smarter numbers!).

      But my thinking was that as they now save less that more employment would be needed in aggregate to make I = S.

      (its quite possible that my understand of the Keynsian model is wrong so please correct me if that is the case)

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    4. Er, I might be totally wrong here, but if S is lower (workers save less), then won't I be lower as well by that logic? And if that's the case, unemployment should rise even more.

      Though it's better to not look too much into I=S, since it's just a national accounting identity. It doesn't reflect any causal relationship.

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