Unemployment delusion

10 January, 2017 at 21:31 | Posted in Economics | 2 Comments

unemployed1Unless you have a PhD in economics, you probably think it uncontroversial to argue that we should be concerned about the unemployment rate. Those of you who have lost a job, or who have struggled to find a job on leaving school, college, or a university, are well aware that unemployment is a painful and dehumanizing experience. You may be surprised to learn that, for the past thirty-five years, the models used by academic economists and central bankers to understand how the economy works have not included unemployment as a separate category. In almost every macroeconomic seminar I attended, from 1980 through 2007, it was accepted that all unemployment is voluntary.

Roger Farmer

‘New Keynesian’ and New Classical microfounded dynamic stochastic general equilibrium models do not incorporate such a basic fact of reality as involuntary unemployment. Of course, working with microfounded representative agent models, this should come as no surprise. If one representative agent is employed, all representative agents are. The kind of unemployment that occurs is voluntary, since it is only adjustments of the hours of work that these optimizing agents make to maximize their utility. In this model world, unemployment is always an optimal choice to changes in the labour market conditions. Hence, unemployment is totally voluntary. To be unemployed is something one optimally chooses to be.

To Keynes it was an obvious and sad fact of the world that not all unemployment is voluntary. But obviously not so to New Classical and ‘New Keynesian’ economists.


  1. From the summary:

    ” The classical proof of the non-existence of ‘involuntary unemployment’ consists of drawing intersecting supply and demand curves and showing that equilibrium is inevitable in the absence of a wage floor above the current equilibrium.
    We show here that all demand curves except the rectangular hyperbola implicitly assume constant aggregate demand. The classical proof against involuntary unemployment is thus a circular one, presupposing conditions that make involuntary unemployment impossible.” — Philip George, Why is there involuntary unemployment?

  2. NAIRU. Central bankers raise or lower interest rates based on this notion. They deny it but still believe in it.

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