Voluntary Mass Unemployment

I’m currently writing my review of W.H. Hutt’s The Theory of Idle Resources — slowly but surely, since I’m swamped with other work. While I think Hutt’s 1939 monograph is a great contribution to the literature, I feel as if he didn’t adequately address the concerns brought to the forefront of economics by J.M. Keynes’ The General Theory. I recently came across something that embodies my reservations: Pavlina Tcherneva’s ‘economists for Romney’ critique. Specifically, her words on R. Lucas’ rational expectations model and its implications for the labor market,

Perhaps no one bears more responsibility for the general apathy among mainstream economists towards the problem of unemployment than Robert Lucas. He is the economist who argued that there was no point in distinguishing between voluntary and involuntary unemployment because agents were ‘perfectly rational’ and the jobless essentially ‘chose’ their condition (1978, 242).

I haven’t read Lucas’ 1978 paper, “Unemployment Policy” (linked in the excerpt above), so I’m not commenting on the truth of that interpretation. But, it’s a similar argument that Hutt implicitly makes. In The Theory of Idle Resources, Hutt essentially blames labor unemployment on three things: ‘pseudo-idleness’ (imagine a wage-earning remaining unemployed expecting to find a higher wage elsewhere), preferred idleness (leisure > work), and monopolization. The latter tends to get the most blame when free-market economists try to explain phenomena such as unemployment-levels during the Great Depression, but growing amounts of evidence are suggesting that this isn’t the ‘proximate cause,’ as Hutt likes to write, of much of prolonged cyclical unemployment.

The closest thing that does come to a critique of what we may call the ‘sticky wages’ theory of idleness, although this isn’t Keynes’ unique criticism of classical employment theory, is what I interpret as a confusing critique of monetary disequilibrium theory. Somebody who knows W.H. Hutt’s work better than I do can comment and explain the relevant section to me, but this is how I understood pages 80–82 (even though here the context is monopoly). But, Hutt doesn’t really address the possibility of an ‘underemployment equilibrium.’ I don’t necessarily mean in the sense Keynes’ meant it, but maybe in the modern sense: where all firms’ employment needs are met at wage prices higher than those which would ‘clear’ the market in the classical sense.

Hopefully, I’ll go into further detail in the review, but it just doesn’t make sense to me to blame only either monopolistic regulations or workers’ preference (or the notion that unemployment insurance significantly aggravates the existence of ‘preferred idleness’). Situations of high unemployment, recessions, are characterized by the capability to recover given changes elsewhere — credit markets, for instance —, such that the employment situation can be resolved. By blaming unemployment on preference or interventions (including monopolies), we take away from other causes and aggravating variables. I suppose the unemployed person can employ herself manufacturing hand-made train models (‘disguised unemployment,’ as Joan Robinson would say?), but if productivity weren’t depressed due to a broken financial system maybe she’d find more favorable terms elsewhere.

21 thoughts on “Voluntary Mass Unemployment

  1. Greg Ransom

    Studies show that re-entry into the work force goes way up just after unemployment benefits run out.

    There certainly is some sort effect of unemployment insurance on idleness and labor markets — however one wants to explain the facts.

    1. JCatalan

      I mean, certainly. The idea makes sense. But, how much explanatory power does it have? To put another way, how much of present unemployment can be explained by the extension of unemployment insurance? It’s an empirical question, surely. But, my point is that there can be other logical reasons behind mass unemployment.

      1. Dan(DD5)

        logical reasons or psychological reasons? Economics deals with the former and not the latter. What more can we say [logically] then that unemployment is really nothing more then about expected revenues (or wages in the case of employees).

        I have decided that I am a basketball player and so I would like to be the point guard in the NBA. But they refuse to hire me. I am therefore involuntarily unemployed.

        What is your occupation? Professional basketball player
        Current employment status? Unemployed. But I apply to all 30 NBA teams every week. They always reject me. The market for basketball players is very weak.

        If there is such a thing as involuntary unemployment (on the free market!) , then on what grounds can you possibly reject the assertion that I am involuntarily unemployed right now.

          1. Dan(DD5)

            Here is why you are wrong. There is no such thing as “no wage jobs available” on the free market. Only on the hampered market. wages is a price. wages can go as low as you like. They can turn negative! Yes, I’ll pay you to hire me. The market will always clear! When you value leisure over $300 in China as in Silvano’s example, the market has cleared. There is no involuntary unemployment. Leisure is chosen by the individual absent coercion. That’s voluntary by the very definition of the term, unless you believe like Silvano that the American has some positive right or a God given right to more the $300.

            I’m really not saying anything different then what Hutt is saying. I’m just phrasing it differently and illustrating it by example.

          2. Silvano

            You gave a definition of “voluntary unemployment” so wide that just being aware that you could try to live spending your time fishing in Kamchatka or farming in a free land in Patagonia makes you a voluntary unemployed. But if you want I can be more radical and assert – since I’m subjectivist too – we could consider also the unexploited “alertness” (in the Kirzerian sense) of business opportunities (self employment, starting up a SME, etc.) a kind of unemployment. I could draw some logical arguments for that, I could but I will not since I’m still in touch with reality.

            @Dan(DD5): Basically you are stating that labor is “doing something” which is not sleeping – no matter what – consciously and purposely without being treated of being shot. Well, maybe it’s even correct to think man in the state of nature if not coerced can’t be unemployed by definition because – setting aside physiological acts – he’s always “doing something” unless he chose to rest (unhampered Robinson Crusoe & unhampered Friday always clear the market).
            But let me say with this kind of approach you are going to fail to address all the relevant economic questions – and let me put the accent on “relevant” – of our time. Both theoretically and empirically.

          3. Dan(DD5)

            What is your definition of “voluntary unemployment” then as oppose to “involuntary unemployment”? Please afterwards, classify the unemployed basketball player (that’t me!) as one of them.

        1. Silvano

          So a laid off american workers who doesnt think about relocating hinself in China at 300$ per month is a voluntary unemployed?You have stretched the definition up to a point which makes no sense.

          1. JCatalan

            And, to even be considered voluntarily unemployed in the most technical of ways we’d have to assume that that person is even aware of a job opportunity elsewhere.

          2. Dan(DD5)

            Why? this is wrong. you don’t have to assume any “perfect” knowledge or anything. And you seem to have evaded the issue. Why am I not involuntarily unemployed as a professional basketball player? Silvano doesn’t like the example because it’s taking things to extreme I guess (I don’t know what definition he’s taking about that I’m stretching). Taking things to extremes is a perfectly viable reasoning tool to demonstrate fallacies and false reasoning.

          3. JCatalan

            Evaded what issue? How is your analogy to you abstaining from employment until you become a professional basketball player at all relevant to my point? Nobody is denying that preferred idleness or pseudo-idleness, as Hutt referred to them, can cause voluntary unemployment. But, I’m talking about a situation where a stagnant economy has cleared its labor market, because firms aren’t offering jobs.

            In your other comment above, you write,

            Only on the hampered market. wages is a price. wages can go as low as
            you like. They can turn negative! Yes, I’ll pay you to hire me. The
            market will always clear!

            You don’t get it. The labor market can clear and still leave people involuntarily unemployed. This is true if firms don’t accept “surplus” labor at whatever price. For example, a firm that rather pay more for less workers than less for more.

            I don’t need help ‘clarifying’ Hutt. I understand Hutt perfectly well. What I’m saying is that Hutt doesn’t engage the real attack on the classical theory of employment (he, in fact, explicitly avoids it).

          4. Dan(DD5)

            How does the labor market clear and there is still involuntary unemployment when wages are free to fluctuate according to supply and demand? You don’t explain. You just assert it, and of course it makes no sense. There is no such thing as firms not hiring, but only not hiring at some given price. This isn’t anything new here but standard supply and demand analysis – How is a “shortage” defined in economics? How is a surplus defined in “economics”? Always at a given hypothetical price. There are no shortages (or surpluses) in the absolute sense, but only at some price. If wages are free to go lower (and even turn negative), then there cannot be any involuntary unemployment. It’s just a logical conclusion.

          5. JCatalan

            How does the labor market clear and there is still involuntary
            unemployment when wages are free to fluctuate according to supply and
            demand? You don’t explain.

            No, I actually explained it two or three times. Once in the post, and once or twice in these comments. That laborers are free to lower their wage demands doesn’t mean that employers have to accept their offers, or that firms are even interested in their labor at any price. I’ll repeat once more. Suppose a situation of stagnant or falling productivity, where productive competition between firms isn’t increasing. This is a world very similar to our’s today. It could be, and there is empirical evidence to support it, that rather than hire a larger body of laborers at lower wages, firms rather hire a smaller pool of laborers at higher prices. Why would this occur? If the firm expects greater productivity from the latter.

            We could even conceive of a situation where at $0 firms wouldn’t demand surplus labor. This is where the marginal product of the worker is negative. As for “negative wages,” it’s hard to make a practical argument for the idea that paying someone to have you labor for them is being employed.

          6. Dan(DD5)

            Precisely! unless you think an American has some God given right to $3000 per month? If hypothetically speaking, $300 is all he is valued on the market (and in China of all places), then he is voluntarily unemployed (if he also does not value his own labor at greater then $300 as self employed)

          7. Dan(DD5)

            I meant to say if that if he rejects the $300 of course, then he has voluntarily chosen leisure of $300 of labor

  2. Ryan Long

    But isn’t Lucas’ point the same as Mises’? Isn’t the argument simply that at any point, anybody can relocate or take a huge pay cut if the really want to work, but they are reluctant to do so? Isn’t the key point the fact that people, when they are able to do so, would rather delay employment in hopes of returning to something in their field, at a salary to which they have accustomed themselves?

    Maybe that’s what “sticky wages” are, I don’t know. I was always taught that “sticky wages” are due to contracts with labor unions. But I’ve always felt that wages are sticky because people will do anything to avoid taking a pay cut, if they think they can. The problem with that view is that it doesn’t fit well into a model.

    …UNLESS you use Lucasian terminology and argue that wages and employment are what they are simply because people want it to be so, regardless of all verbiage to the contrary. It’s something the New Classicists always borrowed from the Austrians, but the NCers had a more persuasive terminology around it: It’s just exogenous.

    That people know why they’re doing what they’re doing is a better explanation than the idea that people are idiots and governments can easily solve economic problems using policy tools.

    1. JCatalan

      In a very broad sense, it’s all about wage reductions. But, to reduce some of the ambiguity and potential for confusion, let’s take George Reisman’s differentiation between profits and wages. You hand manufacturing and selling of toy train models is profit; wages are paid out of profits. The labor market (i.e. the wage market) might ‘clear’ at a point where wages are too high to accommodate all those willing and able to work for wages, including those offering themselves at a lower wage. Why? Maybe because firms prefer a smaller pool of more expensive workers than a larger pool of relatively inexpensive workers, perhaps because they expect higher productivity out of the former. This prices a lot of potential wage-earners out of the market. They could conceivably become profit-seeking entrepreneurs, but they could also enter the market as wage-earners if there were greater competition for labor (i.e. more firms in the market). I’m saying there is value in exploring why the latter isn’t occurring.

      1. Dan(DD5)

        Wages are paid out of profits? I doubt this is out of Reisman. That’s equivalent to saying that costs are paid by profits, which makes absolutely no sense.

        1. JCatalan

          With regards to Reisman, look up ‘the primacy of profit’ in his book Capitalism. One excerpt,

          Smith and Marx are wrong. Wages are not the primary form of income in production. Profits are. In order for wages to exist in the production of commodities for sale, it was first necessary that there be capitalists. The emergence of capitalists does not bring into existence the phenomenon of profit. Profit exists prior to their emergence. The emergence of capitalists brings into existence the phenomena of productive expenditure, wages, and money cost of production.

          — p. 479.

          It’s the centerpiece of his unique criticism of Marx.

          Wages and other factor costs might be paid directly out of capital accumulation, but capital accumulation that could have only occurred thanks to profit making.

          1. Dan(DD5)

            well that’s a very different way of phrasing it then wages are paid out of profits. They’re certainly not and Reisman is certainly saying something very different.

          2. JCatalan

            How so?

            And you’re honestly focusing on the most absurd thing with regards to my response to Ryan Long. ‘Wages paid out of profit’ doesn’t imply that the firm pays wages out of the profits it earns from that labor’s output. It was just a distinction between earning a wage income and earning a profit income.

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