Involuntary Unemployment and the Respecified labor Supply Curve

Abstract

Keynes's concept of involuntary unemployment, which is, perhaps, the most elusive among the several introduced in The General Theory, has been eclipsed by that of search and its related notion that there is an equilibrium level of (i.e., a natural rate) towards which the economy tends. Many neoclassical writers, following Lucas and Rapping (1970, p. 269), argue that the labor market is in equilibrium at each moment of time in the sense that the quantity of labor demanded equals the quantity supplied ex ante. Thus, it is maintained that measured is not part of the shortrun aggregate supply of labor; in consequence, is frictional and voluntary rather than involuntary in nature. The success of this new microeconomics of unemployment and the related demise of Keynes's concept of involuntary is attributable in large part to our long-standing misspecification of the labor supply curve as sn = f(wIP) in which P, the general price level, is the outcome of exogenous monetary factors and is unrelated to changes in money wage rates. Apart from its inconsistency with the realities of macroeconomic processes, the implication of the neoclassical specification is that workers respond to the real wage reduction associated with increased wage goods prices by moving along their labor supply curves to allocate more time to search and other non-market activities, so that the experienced is voluntary. The author is at Temple University. The helpful comments of Sidney Weintraub are warmly remembered. Thanks are also due to Paul Davidson, for his careful atten