Labour day. Rejuvenating the concept of involuntary unemployment
The percentage of labour force which is unemployed and which, in the next quarter, is still unemployed can reasonably be called ‘involuntary unemployment’. Unemployment on the micro level is, by definition, a situation which people are actively trying to change, if this does not result in employment in a reasonable period of time (one quarter) this indicates, also considering the very large and cyclically sensitive differences between countries and cyclically induced changes in individual countries, that unemployment is not just involuntary on the micro level but also on the macro level.
It is necessary to argue this. For two reasons. First, Michel De Vroey has written a book about the fact that the concept of ‘involuntary unemployment’ does not square with neoclassical macro economics. Which, to him, means that we have to scuttle the concept.
De Vroey totally agrees with Keynes. Keynes saw that, in the real world, involuntary unemployment existed (according to him it becomes visible when you see a situation in which demand and employment are expanding but wages aren’t increasing). Keynes, however, did not state that we should scuttle the concept as it does not fit our models and went on to expand the scope of economics, with the (neo)classical economic world only as a special case of a whole array of possible economic worlds. Tellingly, De Vroey does not really try to explain any kind of real data on unemployment, be it statistical or other. We have to refute such nonsense: real scientists always take measurements into account.
But there is another reason: real world economists do have to come up with a metric of the variable. And we do not have this: the Tinbergen trick (anything which is not frictional unemployment is involuntary unemployment) does not suffice anymore in a country with people like De Vroey. Which have to learn to look at the real world, like Keynes did. Spain is a nice example. In Spain, demand is increasing, especially in tourism which grows at a double-digit rate. For instance hotels seem to have increased pricing power. Wage increases are however much lower than they used to be and there is no sign at all of any kind of uptick. To the contrary. Which fits the Keynes idea mentioned above. But: how high is involuntary unemployment in Spain? It’s not just interesting but necessary to investigate if the modern flow data on employment, unemployment and ‘inactivity’ can shed any light on this. I’ve been tinkering with these statistics and calculated all kinds of ratios. Which yielded all kinds of interesting insights but which did not really answer my question, while I did have the feeling that the answer was staring me in the face.
And it did. Data which I first disregarded, the unemployment to unemployment flow (i.e. people which are unemployed in one quarter and also in the next) are part of these flow data. These data are cyclically sensitive, as shown by the example of Cyprus (graph 1, the Eurostat time series are very short, in this period Cyprus is the most dramatic example). And if the percentage of people who do not have paid employment and are actively seeking paid employment (the definition of unemployment which by the way has an ‘Austrian’ ring to it) and which do not find employment within a reasonable period rises, one can in my opinion also state that involuntary unemployment increases. Looking at graph 2 it is, again in my opinion, reasonable to state that the percentage of unemployed which is still unemployed in the next quarter can reasonably be used as a proxy for the level of involuntary unemployment. All data: Eurostat, data for Germany are not available.
And, dear comrades from the USA, when the British have been selling their beer in bottles of 500 millilitres for quite some time now, can’t you accept that labor day is May 1?