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Involuntary Unemployment : the Elusive Quest for a Theory

Listed author(s):
  • Michel, DE VROEY

    (UNIVERSITE CATHOLIQUE DE LOUVAIN, Institut de Recherches Economiques et Sociales (IRES))

This paper addresses the issue of why Keynesian economists have had such a hard time in giving the concept of involuntary unemployment a place in economic theory. Is the gradual demise of this concept a manifestation of some inner defect in economic theory or is it due to some intrinsic weakness in the concept itself, which limits its usefulness when it comes to economic theorising? I have recently published a book which attempts to answer this question, and my aim in this paper is to present its main results. I start by characteristing Keynes’s programme as consisting of the following four elements : 1) demonstrating the existence of involuntary unemployment; 2) demonstrating that wage rigidity can be exonerated as its cause; 3) giving a general equilibrium or interdependency explanation of the phenomenon; 4) demonstrating that demand stimulation is the proper remedy for the problem. Next, I bring out four conceptual ambiguities that have plagued discussions about involuntary unemployment : the confusion between involuntary unemployment and underemployment; the confusion between involuntary unemployment in the individual disiquilibrium sense and involuntary unemployment in the frustration sense; a loose understanding of the notion of full emplyment; and, finally, a less than rigorous definition of the notion of rigidity. The paper continues by presenting my arguments on whether different types of New Keynesian modesls (implicit contracts, efficiency wages, coordination failures and imperfect competition) have succeeded in achieving Keynes’s programme. My conclusion is that they all fail on at least one of its items. In the final section of this paper, I speculate on whether it is still worthwhile for economists with a Keynesian inclination to keep fighting in defence of involuntary unemployment.

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Paper provided by Université catholique de Louvain, Département des Sciences Economiques in its series Discussion Papers (ECON - Département des Sciences Economiques) with number 2005004.

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Length: 25
Date of creation: 01 Feb 2005
Handle: RePEc:ctl:louvec:2005004
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  1. Howitt, Peter, 1985. "Transaction Costs in the Theory of Unemployment," American Economic Review, American Economic Association, vol. 75(1), pages 88-100, March.
  2. Shapiro, Carl & Stiglitz, Joseph E, 1985. "Can Unemployment Be Involuntary? Reply [Equilibrium Unemployemnt as a Worker Discipline Device]," American Economic Review, American Economic Association, vol. 75(5), pages 1215-1217, December.
  3. Shapiro, Carl & Stiglitz, Joseph E, 1984. "Equilibrium Unemployment as a Worker Discipline Device," American Economic Review, American Economic Association, vol. 74(3), pages 433-444, June.
  4. Roberts, John, 1987. "An Equilibrium Model with Involuntary Unemployment at Flexible, Competitive Prices and Wages," American Economic Review, American Economic Association, vol. 77(5), pages 856-874, December.
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