Involuntary Unemployment Due to Instability of the Economy and Fiscal Policy for Full-Employment

Yasuhito Tanaka

doi:10.5296/rbm.v9i1.19541

Abstract

The existence of involuntary unemployment, proposed by J. M. Keynes, is a very important issue in modern economic theory. Using a three-generation overlapping generations (OLG) model, we show that the existence of involuntary unemployment can be attributed to economic instability. Economic instability is the instability of the difference equation for equilibrium prices around the full employment equilibrium, which means that the presence of involuntary unemployment will further reduce employment when the nominal wage rate declines. This instability is due to the negative real balance effect that occurs when consumers' net savings (the difference between savings and pensions) are smaller than their liabilities, which are calculated by multiplying childhood consumption by the marginal propensity to consume. The paper also presents arguments for fiscal spending and tax cuts by seigniorage, rather than public debt, as a fiscal policy to achieve full employment. This paper presents the theoretical and mathematical foundations of Functional Finance Theory (Lerner (1943), (1944)) and MMT (Modern Monetary Theory, Mitchell, Wray and Watts (2019), Kelton (2020)). It may be an attempt to present the theoretical and mathematical foundations of MMT (Modern Monetary Theory, Mitchell, Wray and Watts (2019), Kelton (2020)).

Highlights

The existence of involuntary unemployment, as proposed by J
Economic instability is the instability of the difference equation for equilibrium prices around the full employment equilibrium, which means that the presence of involuntary unemployment will further reduce employment when the nominal wage rate declines
Economic instability is the instability of the difference equation for equilibrium prices around the full employment equilibrium, which means that a decrease in the nominal wage rate due to the existence of involuntary unemployment reduces employment

Summary

Introduction

The existence of involuntary unemployment, as proposed by J. The efficiency wage hypothesis is the most famous microeconomic theory that provides evidence for the existence of involuntary unemployment due to the rigidity of the nominal wage rate. Otaki (2009) assumes indivisibility of labor supply, and has shown the existence of involuntary unemployment using efficient wage bargaining according to McDonald and R. Economic instability is the instability of the difference equation for equilibrium prices around the full employment equilibrium, which means that a decrease in the nominal wage rate due to the existence of involuntary unemployment reduces employment. 1. If consumers' net savings (the difference between their savings and pensions) exceed their liabilities (due to consumption in childhood), a positive real balance effect will operate, and involuntary unemployment will naturally disappear as unemployment reduces nominal wages and prices. This paper may be one of attempts to present a theoretical or mathematical foundation to Functional Finance Theory (Lerner(1943), (1944)) and MMT (Modern Monetary Theory, Mitchell, Wray and Watts (2019), Kelton (2020))

Consumers’ Utility Maximization

They maximize their consumption baskets given the expenditure in each period

Firms’ Profit Maximization

Existence of Involuntary Unemployment

Involuntary Unemployment due to Instability of the Economy

Conclusion