1 Unemployment

Keynes Chapter on Unemployment -- differs from the classics

Chapter 1:

First Argument: Labor supply is NOT a function of the real wage. Evidence: Laborers resists cuts in nominal wage, but do not respond equally strongly to a rise in general price level.

Second Argument: Involuntary Unemployment is observed -- people want to work at going wages, but cannot find work.

Third Argument: If laborers and firms negotiate to reduce nominal wages, this need not cause reduction in REAL wages -- firms and laborer negotiations DO NOT determine real wage, and if general price level goes down as a result of reduction in nominal wage then real wage will remain fixed.

----side argument: Labor unions do not resist rises in general price level, and so are not the obstacle to full employment that classical economic theory imagines them to be.

IV: Involuntary Unemployment: : Men are involuntarily unemployed If, in the event of a small rise in the price of wage-goods relatively to the money-wage, both the aggregate supply of labour willing to work for the current moneywage and the aggregate demand for it at that wage would be greater than the existing volume of employment.

SUMMATION: Keynes agrees with classicals that higher employment requires lower real wage. HOWEVER, he argues that unemployment is not caused by resistance of workers to wages cuts -- RATHER, firms and laborers negotiate over nominal wages, but real wages are determined by forces outside their power to negotiate.

Final Section: Classicals advocate Say's Law -- Supply Creates its own demand.