Theory of Employment

from Asad Zaman

This is the 9th Post in a sequence about Re-Reading Keynes. In chapter 2 of General Theory, Keynes wishes to develop a theory of employment. He claims that classical economics does not have a theory of employment, because it assumes that all resources will be fully employed. But the theory that unemployment will always be 0% – except for frictional – is not a theory which can explain observations of high and persistent unemployment. Taking this post-Depression observation for granted, the question arises how we can create a theory in which the labor resources can be utilized at different levels. In order show that classical theory cannot explain the observed fluctuations in the level of employment, Keynes lists the four possibilities under classical theory which could create a change in the quantity of labor being employed:

1. A more efficiently organized labor market, which find faster matches between the unemployed and job opportunities, would lower frictional unemployment and increase employment.
2. A decrease in the disutility of labor would mean that laborers would be willing to accept lower wage offers, which would lead to expansion of the employment.
3. An increase in the productivity of labor would bring greater rewards to the employers and induce them to hire more labor at a given wage.
4. An exogenous decline in price of consumer goods purchased by laborers would increase the real wage and thereby employment. Exogenous means that demand for these goods by non-laborers decreases, causing the price decline.  read more