*This essay was written for the forthcoming Elgar Companion to Post
Keynesian Economics, John King (ed.), Edward Elgar Publishing, 2002.
Thanks to John King and Randy Wray for comments on drafts. The usual
disclaimer concerning responsibility applies.
In capitalist economies, individuals and families are largely responsible
for providing for their own well-being. In all industrialized and many
developing economies, most workers do not have the means of production to
provide for their own subsistence, but rather must obtain the means of
purchase and means of payment (money) necessary for buying the means of
subsistence by selling their labour-power in the market. In addition, the
requirement that taxes be paid in government currency means that even
those possessing the means of production to provide for their own
subsistence nevertheless must usually enter the labour market to obtain
that which is necessary to settle their tax obligations.
Unemployment, the failure to obtain employment that earns wages or
salaries paid in money, thus has a dire impact on the jobless, and is also
associated with tremendous social and economic costs for society as a
whole. Whereas in neoclassical economics, market systems possess an
inherent tendency to full employment, in Post Keynesian economics
unemployment is seen as a normal feature of capitalist economies. The
effective demand problem means that capitalist economies have trouble
attaining full employment, while the structural change problem means that
capitalist economies have trouble maintaining full employment, even if it
could be attained. In addition, some Post Keynesians-echoing Marx-have
identified the functionality of unemployment, which presents obstacles to
Post Keynesian economic policies to eliminate unemployment. Nevertheless,
Post Keynesian economics does suggest policies that might assist
capitalist economies in attaining and maintaining full employment, without
resulting in other macroeconomic problems, such as inflation.
Unemployment has tremendous social and economic costs (see, e.g.,
Piachaud, 1997). Unemployment causes permanent losses of output of goods
and services. The unemployed are faced with financial insecurity,
resulting in poverty and indebtedness. Certain kinds of criminal activity
are directly related to unemployment. Many studies have linked
unemployment to family disruption, suicide, ill health (physical and
mental), drug addiction, homelessness, malnutrition, poor prenatal care,
school dropouts, racial and ethnic antagonism, and other social problems
(see, e.g., Jahoda, 1982). Unemployment also differentially affects
certain sectors of the population, so that disadvantaged minorities, those
with little education, and youth, e.g., can suffer from rates of
unemployment two to ten times the overall rate.
Unemployment also can destabilize business expectations, as fears of low
demand cool private investment. Related to this, unemployment can also
lead to technological stagnation. If, as Marx and others suggest, high
levels of employment stimulate technical innovation, unemployment would be
associated with less innovation. Firms with high and stable levels of
demand have the resources and the incentive to support going high tech;
with high unemployment and thus cheap labour, firms lack the resources and
the incentive to retool. It has also been shown that unemployment leads
to deterioration in labour skills. All of this suggests that unemployment
may lead to lower productivity growth.
Unemployment is the direct and indirect cause of many social and economic
problems. It can also lead to political instability. Since Keynes, Post
Keynesians have dedicated significant attention to the problems of
unemployment. Since unemployment is the cause of so much social and human
misery, it is of great interest whether capitalist economies tend to full
employment or whether unemployment is a normal feature of capitalism, and
thus a target for government intervention.
In neoclassical economics, market systems tend to utilize all resources
fully, including labour. Perfectly flexible ages, prices, and interest
rates constitute the self-adjusting mechanism that will tend to eliminate
unemployed resources in the long run. In the neoclassical version of
Say's Law, if there is unemployment wages will adjust to increase labour
demand, and interest rates will adjust to ensure that the excess of
aggregate income over aggregate consumption at the full employment level
of output will be invested. There is no involuntary unemployment in the
long run, unless there are market imperfections such as 'sticky' wages,
government interference, or other institutional rigidities (e.g., unions).
For neoclassical economics, if there is unemployment, government should
stay out and let the market correct itself; if there are market
imperfections, government may promote conditions under which the
self-adjusting mechanism works most smoothly, e.g., deregulation,
anti-trust, etc.
In The General Theory of Employment, Interest, and Money, Keynes overthrew
Say's law and demonstrated the possibility and the likelihood that market
systems do not tend to fully utilize resources, even under competitive
conditions, due to insufficient effective demand. Keynes criticized the
neoclassical theory of saving and investment, arguing that traditional
loanable funds theory holds income constant when looking at savings and
abstracts from expectations when analyzing investment. If aggregate
saving is primarily a function of income, not interest rates, and
investment is determined by the expected profitability of investors and
lending institutions, then saving does not determine investment through
variations in the rate of interest, and the economy does not automatically
tend to full employment. Instead private investment determines savings
through changes in income, but there is no reason to expect that the full
employment level of investment will always be undertaken. Keynes's
analysis takes place in historical rather than notional (or logical time).
The past is unchangeable and the future is unknown and unknowable. Money
must be understood as an institution for dealing with radical uncertainty.
The result is that capitalist economies tend to operate with excess
capacity and unemployment. It is therefore unlikely for a capitalist
economy, on its own, to attain full employment.
But capitalist economies have problems maintaining full employment, even
if it could be attained, due to ongoing structural and technological
change, such as changes in labour supply and the supply of natural
resources, labour- and capital-displacing technical change, and changes in
the composition of final demand. An economy running at full capacity and
full employment would be unable to respond to such changes, and sectoral
imbalance is here added to aggregate imbalance as a further cause of
unemployment. Bottlenecks and rigidities mean that full employment is
likely to be inflationary. Structural change will soon result in
unemployment, as technology displaces workers in one sector and fails to
absorb them in another, the formation of real capital fails to keep up
with the pace of a growing labour supply, or declining demand in one
sector fails to be offset by demand for new products. Work such as Pasinetti's (1981) and Lowe's (1976) offers structural models that demonstrate the great unlikelihood of capitalist economies maintaining full employment, even if it could be attained.
The effective demand problem and the structural change problem are
economic causes of unemployment. But Post Keynesians such as Kalecki have
noted that there may also be political obstacles to full employment.
Since unemployment in Keynes is a negative by-product of capitalism, it is
viewed as serving no purpose in the capitalist system and so is clearly
undesirable for all. Kalecki, Steindl, and others, however, have
highlighted that unemployment may be functional in capitalism, an insight
that is drawn from Marx's analysis of the reserve army of labour.
In Marx, unemployment serves several functions. First, it provides the
system with a pool of available labour from which to draw when the pace of
accumulation increases. Second, unemployment serves to discipline
workers, who may not fear being laid off in an environment of full
employment. Third, unemployment holds down wages, since one of the ways
in which unemployment disciplines workers is to decrease their bargaining
power and thus keep wages from rising. Thus, in this view, unemployment
is not only a natural by-product of capitalism, it is essential to its
smooth operation.
Marx postulated a number of different components of the reserve army of
labour. The 'latent reserve' includes those currently outside of the
market system, either performing unpaid household labour or eking out a
meager subsistence in the periphery of Third World economies. The
'stagnant reserve' includes those who are almost never employed, boom or
bust. Members of the 'floating reserve' alternate between employment and
unemployment, with the ups and downs of the business cycle. 'Paupers' is
the term Marx used to identify those who are now often referred to as the
'underclass.' Recently, it has been suggested that changes in global
capitalism have rendered some of these components no longer functional.
And this has resulted in an environment conducive to policies that may
promote the elimination of the emerging 'surplus population' with scary,
genocidal, and racist connotations (Darity, 1998).
Policies to address unemployment must recognize both the effective demand
problem and the structural change problem, as well as the functionality of
unemployment and the emergence of a hard-core, 'unemployable' sector no
longer functioning as a reserve army. Traditional Keynesian policies
initially attempted to stimulate aggregate demand through fiscal and
monetary policies. Stimulating the private sector to full employment may
address the aggregate demand problem but not the structural change
problem. In fact, since the structural change problem emerges most
forcefully at higher levels of capacity utilization and employment,
stimulating private sector demand may increase the structural change
problem. Some Post Keynesians would utilize incomes policies to deal with
some of the symptoms. Other routes would include promoting public works
and the 'socialization of investment.' These latter approaches, if
designed correctly, may be more effective than conventional fiscal
stimulus in dealing with the structural change problem. In the framework
of a capitalist economy full employment requires a policy-or a set of
policies-that can increase effective demand without bringing on structural
rigidity and that can eliminate unemployment while finding some
institutional mechanism for dealing with the functionality
question.
Recently Post Keynesians have suggested that such a policy is available in
the form of a kind of permanent Works Progress Administration (Wray,
1998). Hyman Minsky (1986) referred to this as government as 'employer of
last resort.' Under such a policy, the government would provide a Public
Service Employment (PSE) job to anyone ready and willing to work. As the
economy expands (contracts), the private sector demand for labour would
increase (decrease), and the PSE sector would shrink (grow). PSE workers
would be employed in all kinds of social and public services that would
benefit the community. Elimination of long periods of unemployment would
preserve and potentially enhance labour productivity. The social and
economic costs of unemployment due to income insecurity and poverty would
decline, and society would experience a significant benefit in the form of
less crime and other social problems associated with unemployment. The
effective demand problem would be solved by maintaining aggregate income
at high levels, but the PSE approach, unlike traditional demand stimulus,
would address the structural change problem as well (Forstater, 1998).
Instead of workers alternating between employment and unemployment,
sectoral and aggregate change would only alter the proportion of private
and public sector employment. PSE also can address environmental
problems. Stimulating the private sector to full employment would surely
result in greater pollution and exhaustible resource utilization, while
PSE activities may be designed to pollute less and use less fossil
fuels.
Unemployment is at the root of many of the economic and social problems of
capitalism. Some would argue that, instead of tinkering with capitalism,
a new economic system should be sought in which the right to a job as put
forward in the United Nations Universal Declaration of Human Rights is
realized. Perhaps in a post-capitalist society the employment-money link
will be severed and a new mode of social and economic organization will
make unemployment extinct and irrelevant. Until such a time, however,
there is no reason not to go immediately to full employment with a
guaranteed public service job for anyone ready and willing to
work. 
BIBLIOGRAPHY
Darity, Jr., William A., 1999, "Who Loses from Unemployment?," Journal
of Economic Issues, Vol. 33, No. 2, pp. 491-496.
Forstater, Mathew, 1998, "Flexible Full Employment: Structural
Implications of Discretionary Public Sector Employment," Journal of
Economic Issues, Vol. 32, No. 2, pp. 557-563, June.
Jahoda, Marie, 1982, Employment and Unemployment: A
Social-Psychological Analysis, Cambridge: Cambridge University
Press.
Lowe, Adolph, 1976, The Path of Economic Growth, Cambridge:
Cambridge University Press.
Minsky, Hyman P. 1986, Stabilizing an Unstable Economy, New Haven:
Yale University Press.
Pasinetti, Luigi, 1981, Structural Change and Economic Growth,
Cambridge: Cambridge University Press.
Piachaud, David, 1997, "A Price Worth Paying? The Costs of Unemployment,"
in J. Philpott (ed.): Working for Full Employment, London:
Routledge.
Wray, L. Randall, 1998, Understanding Modern Money: The Key to Full
Employment and Price Stability, Cheltenham, U. K.: Edward
Elgar.
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