Voluntary or Involuntary Unemployment - Coursework Example

2.3 Review of Voluntary or Involuntary Unemployment Unemployment is defined as a period of time that a person capable of working spends without employment, and generally does not refer to those removed from the labor force, such as at-home spouses. It can occur for a variety of reasons in capitalist economies, including lack of available work. It is normally measured as a percentage of the population that is unemployed in order to yield some idea of nation or groups macroeconomic condition (“Resolution concerning statistics,” 1986). Economists have held a long-standing disagreement on the nature of unemployment, with some arguing that the dominant element of unemployment is voluntary and others disagreeing on the grounds that they believe that unemployment is largely an involuntary phenomenon. Various theories of economics have been constructed that explain unemployment by placing the cause of unemployment on independent decisions of the worker or on failings within the market itself. Not all societies suffer from unemployment. For instance, if a member of a hunter gatherer society were to be unemployed, this would equate with accepting a fate of starvation. Similarly, feudal serfs and slaves that were forced to work could not be unemployed either by choice or circumstance and remain part of their societies (Yates, 2003, p.66-67). Unemployment, however, always appears in free market economies, such as those that occur in capitalist societies. Under these circumstances, employers provide jobs as dictated by the market. Jobs for farmer workers may be limited by weather or crop disease, and jobs in manufacturing may be limited by demand for a product. As economies become increasingly global, interactions between national markets and global demand may cause increase or decrease of available jobs. As such capitalist societies have some inherent amount of unemployment that occurs when not enough jobs are available to go around, leaving some unemployed because of lack of jobs (Yates, 2003, p.63). Because of this, some level of unemployment is expected in a normally functioning capitalist economy, and is not considered to reach crisis levels until unemployment reaches twenty to thirty percent of the total population (Yates 2003, p.67). Unemployment is a trend that is fundamental to capitalist societies, but does not occur in all societies. In the traditional neoclassical theory of economics it is stated that all individuals in a society have complete freedom to make their own economic choices, and as such the ultimate cause of unemployment is the worker’s choice not to gain employment (Yates, 2003, p.63). This means that those who are unemployed, are unemployed because they prefer leisure to employment, and not because of any outside factors. This theory stresses that each individual element of society, in this case the worker, exercises complete freedom from outside influence. The theory was developed under the a strong influence of value theory and distribution theory. This neoclassical vision involves select economic “agents”, which represent companies, households, and firms, that are all attempting to optimize themselves. Buyers will attempt to get the maximum gain when they purchase goods by maximizing utility. Similarily firms will emply individuals to balance gains from offering the marginal unit of their service (Weintraub 2002). Because this theory allows individuals to make choices in order to optimize their own conditions, it is analogous to many biological cooperative systems—in which the overall behavioral, or in this case economic, pattern results from the self-driven choices of many individual parts. Neoclassical economics represents one metatheory of economics, or a set of defined implicit rules for developing a theory based in another theory or set of values (Weintraub 2002). In each example of neoclassical theory, unemployment is seen as the choice of the individual, as based on the relevant information that that individual has attained. Any theory may be defined as neoclassical, including neo-Marxian, neo-industrial, and neo-Austrian economic theories if they abide by a simple set of rules: 1. Rational Preferences among outcomes are expressed by individual people 2. Firm maximize profits and individuals maximize utility 3. All people will act independently based on the relevant information that they are presented (Weintraub 2002). It follows that in most neoclassical economics policies, compensation for the poor or unemployed is minimal, as it is seen as a measure that will discourage the poor to return to work for reasonable wages. It assumes that the poor unemployed choose not to work not because work is not available to them, but because they are not willing to forego leisure in order to work for market wages (Yates, 203, p.147). Conversely, neoclassical economists argue for mandatory education and training for all individuals and subsidization of health care programs (Yates, 203, p.148). In this economic theory, it is assumed that people choose not to work based on the information that have, such as their wage level, education, and perceived opportunity, which makes education and training essential to promoting the choice of working because being unemployed is assumed to be a voluntary action. Neoclassical economics describes involuntary unemployment as a market failure in which the number of people seeking jobs outnumber the available jobs, creating a barrier to entry that may keep some people that want to be employed from finding jobs (Yates, 2003, p. 126). If this occurs it will be at excessive cost to the economy as a whole. This necessitates that some entity, such as the government, be designated to look out for the economy by methods such as price subsidies, minimum wages, income subsidies, and market-regulating laws (Yates, 2003, p. 127-129). The government often assumes the critical role as the mediator of the economy in neoclassical economic theories in order to prevent involuntary unemployment. In the mid 1930’s John Maynard Keynes began working on a new theory at Cambridge University in England that basically stated that the neoclassical ideas did not apply during a recession because people were more likely to hoard their private assets instead of investing in the economy. This came to be known as the General Theory of Employment (Yates 2003, p. 135). Keynes argued that there was no inherent state of employment as the neoclassical economists had assumed, instead there was the possibility that during economic downturn the economy could continue to slide downhill instead of recovering to what the neoclassical theory had assumed was the natural state of employment equilibrium. In Keynes theory, the cause of unemployment is because of unavailability of jobs that stems back to a fundamental problem in the market that cannot be righted without some outside influence. During the Second World War, government spending for military and war efforts increases, and, just as Keynes theory suggested, the economy quickly bounced back from the depression, largely because everyone that was willing to work could easily find wartime jobs, virtually eliminating involuntary unemployment (Yates, 2003, p.136). After the Second World War, this theory became a popular one with many government bodies, including the Unites States, as it encourages workers willing to work to get and retain employment. Keynes’ General Theory of Employment, Interest, and Money was first published in 1936 in response the Great Depression and vast global levels of unemployment and economic distress, particularly in Britain and the Western economies (Keynes, 2006, p. xiv). It explored involuntary unemployment and proposed solutions that were nothing short of revolutionary during its era. Contemporary Keynesian economics today has its roots in the original publication of Keynes’ General Theory of Employment, Interest, and Money but also has been largely influence by a number of other personalities in economics, including Paul Samuelson, James Tobin, John Hick, and a number of other well-known economists. Together, this theory largely represents the modern understanding of macroeconomics as it is seen in many textbooks and reviews (Keynes, 2006, p. xv). The Keynes theory is fundamental to any study of contemporary economics, and in understanding the economic differentiation between voluntary and involuntary unemployment. Keynes’ work broke from neoclassical economics by letting go of the theory that full employment output was attainable in a capitalist society, and directly challenged this aspect of neoclassicism in his writing. Whereas neoclassical economics had assumed that voluntary unemployment, often due to unwillingness accept wage pay cuts according to the market’s demand, Keynes refuted that workers has little control of the real wages. He asserted that because labor costs are the most important element of prime costs, a decline in labor costs would undoubtedly cut prices thereby keeping wages largely intact. He criticized neoclassical economic systems for only gauging the volume of unemployment, without looking at the direct of its trends, which are far more important in a long-range economic plan (Keynes, 2006, p.xx). Essentially, Keynes addressed the causes of involuntary unemployment and gauged it as what physical scientists might term a vector movement, one with both a magnitude and direction that are significant to the economy. Researchers that study social sciences and economics have shown that when people are willing to work, they express a high level or unhappiness or distress when they are unemployed. As such, anxiety levels have been used in research to quantify both the percentage and volume of the unemployed population that wants to work but remains unemployed involuntarily versus those that remain unemployed by their own choice, or voluntarily. This research has shown that the vast majority of those unemployed in capitalist societies experience high stress levels and are generally not voluntarily unemployed (Chadi 2010). This contradicts neoclassical thought on unemployment that suggests that voluntary unemployment, either because the worker is not willing to work for wages that the market can support with current demand levels or because the worker simply prefers leisure for some other reason, is the largest factor in unemployment. The debate between economists on the issue of the importance of the direction and volume of unemployment in both the voluntary and involuntary forms continues, with most contemporary economist applying modified versions of the Keynesian theory. Economic researchers have come up with new, and more advance methods of measuring unemployment and its causes. This is often accomplished by working alongside computer specialists, psychologists, and other experts to interpret both the amount of unemployment and predict its future increases or decreases. Though unemployment may never be eliminated entirely, understanding voluntary and involuntary unemployment is fundamental to addressing modern policies on unemployment. References Chadi, Adrian. (14 July 2010) How to Distinguish Voluntary from Involuntary Unemployment: On the Relationship between the Willingness to Work and Unemployment-Induced Unhappiness. Kyklos International Review for Social Sciences, 63(3), p 317-329. Keynes, J M. (2006). The General Theory of Employment, Interest and Money. Atlantic Publishers & Distributors. Delhi: India. Resolution concerning statistics of the economically active population, employment, unemployment and underemployment, adopted by the Thirteenth International Conference of Labour Statisticians. (October 1986). International Labor Organization. Retrieved from http://www.ilo.org/public/english/bureau/stat/download/res/ecacpop.pdf Weintraub. (2002) Neoclassical Economics. The Concise Encyclopedia of Economics. Retrieved from http://www.econlib.org/library/Enc1/NeoclassicalEconomics.html Yates, M. D. (2003). Naming the system: Inequality and work in the global economy. New York: Monthly Review Press. Read More