Keynesian Unemployment is Involuntary and is an Equilibrium State

Abstract

After the appearance of Modigliani’s celebrated 1944 article, which made one of the most decisive contributions to the ‘neo-classical synthesis’ of Keynesian theory, the opinion which came to prevail among economists was that Keynesian unemployment could be accounted for as the result of a basic maladjustment of the supply of money to the level of money wages (see Modigliani, 1944). At first, following Modigliani’s approach, a distinction was made between the ‘basic case’, where unemployment was assumed to stem from the above-mentioned monetary disequilibrium, and the ‘special case’, where employment was thought to be determined by the liquidity trap; but after the introduction of the ‘real balance effect’ into the model, the special case was dismissed and consequently, the conclusion prevailingly drawn was that ‘the critical assumption in Keynes’s theory is that wages are rigid downwards’ (Leijonhufvud, 1969, p. 49).KeywordsLabour SupplyTrade UnionReal WageRelative WageImperfect CompetitionThese keywords were added by machine and not by the authors. This process is experimental and the keywords may be updated as the learning algorithm improves.