Unemployment: Causes and Cures
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In Chapter 9, Section 9.3 we discussed the nature and measurement of unemployment, together with its economic, social and political costs. While there is a general consensus that the maintenance of a high and stable level of employment is an important objective of macroeconomic policy, there is considerable controversy over why unemployment exists and what governments can do to reduce it. This chapter looks at the debate over the causes of, and cures for, unemployment. At the outset it is worth emphasizing that the central question that underlies this continuing debate is whether the cause of unemployment is largely to be found inside or outside the labour market. If unemployment is essentially due to imperfections in the labour market, then government policy to reduce unemployment needs to be directed to alleviate such imperfections. If the cause of unemployment is largely to be found outside the labour market — because of insufficient spending in the goods market — then government policy needs to be directed to stimulate aggregate demand in the economy.This chapter examines the causes and problems of unemployment and considers how it can be reduced. One of the major economic objectives of governments is the reduction of unemployment. There are several causes of unemployment which can be cyclical (or demand-deficient) unemployment, structural unemployment, and seasonal unemployment. The equilibrium, or natural rate of unemployment, measures those unemployed when the labour market is in equilibrium. Unemployment represents a waste of resources and means the economy is not producing as much as it could. Governments will use different policies to reduce unemployment depending on the cause.
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This paper argues that John Maynard Keynes had a targeted (as contrasted with aggregate) demand approach to full employment. Modern policies, which aim to close the demand gap, are inconsistent with the Keynesian approach both theoretical and methodological grounds. Aggregate demand tends to increase inflation and erode income distribution near full employment, which is why true full employment is not possible via traditional pro-growth, pro-investment aggregate demand stimuli. This was well understood by Keynes, who preferred targeted job creation during expansions. But even in recessions, he did not campaign for wide-ranging aggregate demand stimuli; this is because different policies have different employment creation effects, which for Keynes was the primary measure of their effectiveness. There is considerable evidence to argue that Keynes had an on the spot approach to full employment, where the problem of unemployment is solved via direct job creation, irrespective of the phase of the business cycle.
Effective demand
Post-Keynesian economics
Aggregate behavior
Aggregate supply
Investment
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In Chapter 9, Section 9.3 we discussed the nature and measurement of unemployment, together with its economic, social and political costs. While there is a general consensus that the maintenance of a high and stable level of employment is an important objective of macroeconomic policy, there is considerable controversy over why unemployment exists and what governments can do to reduce it. This chapter looks at the debate over the causes of, and cures for, unemployment. At the outset it is worth emphasizing that the central question that underlies this continuing debate is whether the cause of unemployment is largely to be found inside or outside the labour market. If unemployment is essentially due to imperfections in the labour market, then government policy to reduce unemployment needs to be directed to alleviate such imperfections. If the cause of unemployment is largely to be found outside the labour market — because of insufficient spending in the goods market — then government policy needs to be directed to stimulate aggregate demand in the economy.
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This paper looks at the evolution of the unemployment problem in the Euro Area. Our goal is to look at what are the roots of the unemployment problem and to devise reasons of the already chronic unemployment problem. We show the main factors that prolong the agony of unemployment and whether it is likely that in the near future, the problem of unemployment in the Euro Area will bi past. In the Euro Area we follow the analysis of basic macroeconomic indicators of balance in an economy - GDP, inflation and unemployment. We consider whether the monetary strategy of inflation targeting has contributed to the unemployment problem, by reducing the potential output, but also to confirm that within the current global crisis there are some deviations from the theoretical concepts of basic macroeconomic relationships - Okun's law and the Phillips curve. We show that only Germany, with a 'small' sacrifice, can save the real sector in the peripheral Mediterranean countries, as well as in the entire Euro Area.
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Most of the theoretical and empirical literature on the effects of unemployment insurance (UI) during the last 25 years has focused on the supply-side implications. The object of this article is to argue that much of those discussions over the disincentive effects of UI is misdirected. Our intention is to bring back to the forefront a discussion of the positive macroeconomic role played by UI net injections in stabilizing aggregate demand. Our empirical results using Canadian data for the postwar period support this Keynesian view of the stabilizing effect of UI in contemporary economies.
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This paper argues that John Maynard Keynes had a targeted (as contrasted with aggregate) demand approach to full employment. Modern policies, which aim to close the demand gap, are inconsistent with the Keynesian approach on both theoretical and methodological grounds. Aggregate demand tends to increase inflation and erode income distribution near full employment, which is why true full employment is not possible via traditional pro-growth, pro-investment aggregate demand stimuli. This was well understood by Keynes, who preferred targeted job creation during expansions. But even in recessions, he did not campaign for wide-ranging aggregate demand stimuli; this is because different policies have different employment creation effects, which for Keynes was the primary measure of their effectiveness. There is considerable evidence to argue that Keynes had an on the spot approach to full employment, where the problem of unemployment is solved via direct job creation, irrespective of the phase of the business cycle.
Effective demand
Post-Keynesian economics
Aggregate behavior
Aggregate supply
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Abstract The paper examines Danish unemployment and the employment policy in the 1930s. The unemployment data indicate that though the unemployment increased dramatically the rate of unemployment remained low. The official Danish unemployment records definitely underestimated the actual unemployment in the early 1930s, but the discrepancy was hardly as big as some scholars have suggested. The paper furthermore points out that the rather atypical rise in the Danish unemployment from the mid-1930s can be attributed to a rise in the natural rate of unemployment due to an improved unemployment insurance coverage and a more comprehensive registration of the unemployment. The second part of the paper deals with the Danish employment policy. Unemployment remained high on the political agenda, but the employment problem never became the main target for the economic policy. An active employment policy was constrained by the problems of the balance of payments and the political disagreements in parliament. While the macroeconomic policy did help to stabilize the economy and the employment, the number of measures directly targeting the labour market was small, and they seldom gave rise to much job creation.
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Unemployment is an integral part of a market economy. This means that the inevitable feature of a market economy is the existence of a certain level of unemployment, despite the fact that unemployment is one of the visible indicators of macroeconomic instability in the country. Unemployment causes macroeconomic instability precisely when the level of actual unemployment exceeds the set natural limit.
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