6 Involuntary Unemployment*

A. G. Hines
BIRKBECK COLLEGE LONDON, UK

INTRODUCI'ION

The characterisation of involuntary unemployment is of importance both for

economic theory and policy. It is important for theory in as much as it
delineates that unemployment which is attributable to the malfunctioning of
the economic system and not to the voluntary decisions of individual workers.
It is due to a deficiency in aggregate demand whose primary cause is
insufficient autonomous expenditure and it manifests itself in an unsatisfactory
co-ordination of economic activity in production and exchange. It is
important for policy since it circumscribes that unemployment for which
demand management at the appropriate level of decision-making is the correct
response.lt is also important for measurement, for example, quantifying the
magnitudes relevant to policy responses.
In this paper, we do three things: consider alternative characterisations and
rationalisations of involuntary unemployment, set out two models which fit
each of the two basic alternative characterisations, draw out the implications
for Keynesian theory and demand management policy of the different methods
by which profitability is altered in each model to induce the required response
of output and employment, and discuss how the theory and policy are
affected by the behaviour of prices and money wages.

I CONCEPTS OF INVOLUNTARY UNEMPLOYMENT

The point of departure for a consideration of involuntary unemployment must

be Keynes' (1936) characterisations ofit. 1 (a) First, there is the famous one.

Men are involuntarily unemployed if, in the event of a small rise in the
price of wage goods relative to the money wage, both the aggregate supply
of labour willing to work for the current money-wage and the aggregate
demand for it at that wage would be greater than the existing volume of
employment.

* This paper is part of a wider enquiry into aggregate economic theory.

I am indebted to my colleague John Muellbauer for valuable comments.
1 Keypes, General Theory, pp. 15, 26, 16-17, 7.

E. Malinvaud et al. (eds.), Unemployment in Western Countries

© International Economic Association 1980
142 Macroeconomic Analysis

(b) Moreover, and this is important for our subsequent discussion, he

associates this with another which he regards as equivalent. There is
involuntary unemployment, 'if aggregate employment is [not] inelastic in
response to an increase in the effective demand for its output' 1 (c) A third is
that there is involuntary unemployment when the real wage is not equal to
the marginal disutility of labour, i.e. when the second classical postulate does
not hold. (d) Finally, as Kahn (1976) has reminded us, Keynes had another.

... the population generally is seldom doing as much work as it would like
to do on the basis of the current wages ... More labour would, as a rule,
be forthcoming.at the existing money-wage if it were demanded.

It should be clear that the first defmition or characterisation is stronger than

all the others. Thus, the conditions given in the first cannot be met if the
second is not, i.e. if there is a full employment level of aggregate demand.
Moreover, as we shall see, as is required by (c), in an equilibrium with
deficient aggregate demand in which the conditions in (a) are met, 'the second
classical postulate' does not hold, i.e. the marginal rate of substitution of
income for leisure is not equal to the real wage. Kahn opts for (d). So also do
Barro and Grossman (1976) and Malinvaud (1977), at least implicitly. Kahn
thinks that the first definition is unnecessarily complicated for reasons which
we summarise as follows. The introduction of the response of the labour
supply to a fall in the real wage into the defmition is unnecessary and in any
case, the sign of this response is moot in principle. An inverse relationship
between the demand for labour and the real wage does not hold empirically
and as Keynes himself admitted, his theory could have been put over more
simply without it and his practical conclusions would thereby have even
greater force.
However, it is obvious that (a) implies (d). Moreover, while (d) is sufficient,
it is not necessary for the existence of involuntary unemployment. To see
this, consider the definition of the classical notion of voluntary unemploy-
ment which Keynes gives. '[V] oluntary unemployment [is] due to the refusal
or inability of a unit of labour ... to accept a reward corresponding to the
value of the product attributable to its marginal productivity' .2 It is clearly
seen that this is the opposite of involuntary unemployment in senses (a)-(c),
but not in the sense of (d) which is formally consistent with all unemployment
being voluntary.
We will analyse models based on characterisations (a) and (d). We will also
consider some implications of the relationship between voluntary and
involuntary unemployment.

1 Word in parenthesis added.

2 Loc. cit., p. 6.