Out of Work. Richard K Vedder
by formulating complex models in which excessive real wages are sometimes the explanation for so-called “classical unemployment,” while at the same time price rigidities in goods markets are permitted to create “Keynesian unemployment.”33 This is consistent with the general trend of theoretical developments of the past two decades: an increasing tendency to look more closely at the microeconomic foundations of unemployment, even to the extent, on occasion, of analyzing unemployment in terms of real wages and other phenomena.
To recapitulate, while economists were generally indifferent to unemployment during the first third of the century, they tended to blame the phenomenon largely on wages in excess of an equilibrium market-clearing level. In the second third of the century, underconsumptionist thinking came to dominate in the form of Keynesianism. Unemployment was largely attributed to insufficient aggregate demand for goods and services. Unlike the previous orthodoxy, Keynesian theory supported activist macroeconomic government policies. The last third of the century has been characterized by a variety of theories competing for dominance. Keynesianism and underconsumptionism have been in at least partial retreat, while theories denying the effectiveness of policy actions have dominated, along with some renewed attention to the role of wages in explaining unemployment. Nevertheless, the ghosts of Keynesianism and underconsumptionism are still with us in many ways.
The remainder of this book explores the historical record of unemployment in the United States. In particular, we will examine the original neoclassical wage-oriented theory and its effectiveness in explaining observed variations in unemployment. A number of questions will be explored, such as: Was the neoclassical theory really ever a dominant orthodoxy in the United States? Was its almost total passage from the intellectual scene in the 1930s justified on the basis of historical experience? Does the Keynesian (or other) explanation fit the experience better? Was the great governmental involvement in the macroeconomy that followed from the Keynesian revolution a success or failure? What seems to have caused the rise in noncyclical unemployment? Why is it that the incidence of unemployment has varied so dramatically with age, sex, and race in recent decades, but not earlier? These are but a few of the issues with which we will deal.
NOTES
1. See John Maynard Keynes, The General Theory of Employment, Interest and Money (New York: Harcourt Brace, 1936).
2. On the behavior of economists of the late neoclassical era, see William J. Barber, From New Era to New Deal (Cambridge: Cambridge University Press, 1985).
3. This is so in part because of the famous law of diminishing returns. Also, where there is imperfect competition in product markets, firms must lower prices to sell increased output, lowering the dollar revenue received per unit of increased production. Profit maximizing firms will hire workers up to the point where the marginal cost of the labor is equal to the marginal revenue product of the labor.
4. There is some evidence supporting the view that occasionally a backward-bending supply curve exists (the elasticity of labor supply with respect to wages is negative.) For a discussion of labor-supply elasticity that incorporates some empirical results showing negative elasticities, see Mark R. Killingsworth, Labor Supply (Cambridge: Cambridge University Press, 1983).
5. The elasticity of labor supply is usually estimated to be .20 or lower. For a rigorous discussion of the estimation issues, with citations to several studies, see Thomas E. MacCurdy, “Interpreting Empirical Models of Labor Supply in an Intertemporal Framework with Uncertainty,” Longitudinal Analysis of Labor Market Data, ed. James J. Heckman and Burton Singer (Cambridge: Cambridge University Press, 1985), chap. 7.
6. A number of modern economists have empirically observed the relationship posited by the wages hypothesis. For a recent example, see Stephen J. Nickell and James Symons, “The Real Wage-Employment Relationship in the United States,” Journal of Labor Economics 8 (1990): 1–15.
7. See his The Theory of Unemployment (London: Macmillan, 1933); Industrial Fluctuations (London: Macmillan, 1927); and “Wage Policy and Unemployment,” Economic Journal 37 (1927): 355–68. Well-known later papers include “Real and Money Wage Rates in Relation to Unemployment, ibid., 47 (1937): 405–22, and “Money Wages in Relation to Unemployment,” ibid., 48 (1938): 134–48. Other writers espousing similar views include Jacob Viner, Balanced Deflation, Inflation or More Depression (Minneapolis: University of Minnesota Press, 1933), especially pp. 12-13; William H. Beveridge, Causes and Cures of Unemployment (London: Longman, Green and Co., 1930), chap. XVI; Willford I. King, The Causes of Economic Fluctuations (New York: Ronald Press, 1938), chap. 8; and Lionel Robbins, The Great Depression (London: Macmillan, 1934).
8. See Ludwig von Mises, Human Action, 3d rev. ed. (Chicago: Henry Regnery, 1966), pp. 600, 770.
9. See F. A. Hayek, Monetary Theory and the Trade Cycle (New York: Augustus Kelley, 1966). On the Austrian position as it relates to the Great Depression, see Murray Rothbard, America’s Great Depression (Kansas City: Sheed & Ward, 1963.)
10. Chiaki Nishiyama and Kurt R. Leube, eds., The Essence of Hayek (Stanford: Hoover Institution Press, 1984), p. 7. Hayek, however, believes that “we are … unable to demonstrate a statistical correlation between the distortion of relative prices and the volume of unemployment” (ibid.). This volume in fact does provide evidence of such a statistical relationship.
11. See, for example, Richard J. Jensen, “The Causes and Cures of Unemployment in the Great Depression,” Journal of Interdisciplinary History 19 (1989): 553–83, T. J. Hatton, “A Quarterly Model of the Labour Market in Interwar Britain,” Oxford Bulletin of Economics and Statistics 50 (1988): 1–23, and Michael Beenstock and Peter Warburton, “Wages and Unemployment in Interwar Britain,” Explorations in Economic History 23 (1986): 153–72.
12. For further discussion of the natural rate of unemployment, see below, chapter 13.
13. Specifically, in some states able-bodied recipients of public assistance must register with unemployment offices in order to receive welfare benefits. In some cases, these individuals are not truly looking for employment.
14. See John A. Hobson, The Economics of Unemployment (London: George Allen & Unwin, 1922); W. T. Foster and W. Catchings, Profits (Boston: Houghton Mifflin, 1925); Foster and Catchings, Business Without a Buyer (Boston: Houghton Mifflin, 1927); see also C. H. Douglas, Credit-Power and Democracy (London: C. Palmer, 1920).
15. Actually, Say’s contribution was more than simply “supply creates its own demand.” For an extended discussion, see Thomas Sowell, Say’s Law: An Historical Analysis (Princeton, N.J.: Princeton University Press, 1972.)
16. See A. W. Phillips, “The Relation Between Unemployment and the Rate of Change of Money Wage Rates in the United Kingdom, 1861–1957,” Economica 25 (1958): 283–99. As the title indicates, Phillips’s original paper examined the wage-unemployment relationship. However, the emphasis soon shifted to the price-unemployment relationship. See Paul A. Samuelson and Robert M. Solow, “Analytical Aspects of Anti-Inflation Policy,” American Economic Review 50 (1960): 177–94, and Richard G. Lipsey, “The Relation Between Unemployment and the Rate of Change of Money Wage Rates in the United Kingdom, 1862–1957: A Further Analysis,” Economica 27 (1960): 1–31.
17. An excellent treatment of the classical versus the Keynesian perspective at a moderately rigorous level is found in Richard T. Froyen, Macroeconomics: Theories and Policies (New York; Macmillan, 1990.)
18. See Phillips, “Unemployment and the Rate of Change.”