Existence of an Under-Employment Equilibrium

Abstract

1. From the point of view of the traditional Walrasian general equilibrium theory, one of the most puzzling things is the existence of an under-employment equilibrium at which there is excess supply of labor with a positive wage rate, since the usual notion of the term equilibrium is a set of prices at which there is no tendency for change. There have been suggested two kinds of reconciliation of Walrasian general equilibrium theory with the existence of the involuntary unemployment. One is to deny the existence of an underemployment equilibrium by regarding involuntary unemployment as an adjustment phenomenon. This view has been shared by many economists including Patinkin, Clower and Leijonhufvud1. We shall consider it in Section 2. The other is to reconcile general equilibrium theory with unemployment by assuming wage rigidity as is usually done in the orthodox Keynesian economics. The newest and most rigorous version of this view is given by Glustoff [7]. We shall criticallv consider it in Section 3.