A Post Keynesian Explanation of Employment in the United States

Abstract

The purpose of this paper is to provide an empirical verification of the Post Keynesian theory of employment. The Post Keynesian theory is based on the Principle of Effective Demand discussed in chapter 3 of Keynes' General Theory. The Post Keynesian model of employment confronted here with the data from the United States is derived from Weintraub (198142) and Davidson (1998).1 In this model the primary determinant of employment is autonomous expenditures in wage units. The Post Keynesian theory's emphasis on autonomous expenditures contrasts with that of other contemporary theories, stressing alternatively the independent role of money supply, unanticipated changes in money supply, and technology shocks as the main determinants of the aggregate level of economic activity.2 Opinion is divided about the need for empirical testing of economic theories. But, given the scientific need for confronting theories with facts, empirical verification remains a crucial instrument of economic science (see Blaug, 1998). This paper is consistent with the methodology that considers verification an important complement of economic theories. Recent introduction of the cointegration methodology by Engle and Granger (1991) allows economists to provide convincing tests of