Equilibrium in underemployment

The equilibrium in the case of underemployment represents a macroeconomic situation within market economy structures in which the goods markets of an economy have been cleared ( market equilibrium ), but unemployment still exists. The possibility of such a situation was and is denied by neoclassics . It was not until 1936 that John Maynard Keynes asserted in his General Theory of Employment, Interest and Money the possibility of the existence of what he called “involuntary unemployment”, on the grounds of which he formulated a fundamental criticism of central classical theorems .

Previously, it was considered certain that markets inevitably evacuate themselves via the price mechanism . In the labor market, too, if market processes function, a market-clearing equilibrium must be established - cyclical unemployment would therefore be excluded. This represents an overhang of the labor available compared to the demand on the part of the companies. In this case, a falling price - that is, a falling wage - makes hiring more attractive and thus eliminates unemployment . The lower wages reduce production costs, so that the additional production is also sold.

Keynes breaks this logical chain by introducing the importance of expectation formation into economics. In his macroeconomic model, aggregate demand is divided into private consumption and private investment (and possibly government consumption). The investment demand does not only depend on the cost of the financing (the interest rate ), but also on the expected return or profit from the investment.

If pessimistic expectations are widespread in an economy, then low or even negative aggregate earnings expectations result. If a negative return is expected, however, no economic entity will want to invest. So there is no demand for capital goods . If private consumption cannot absorb this, then not all products can be sold. The companies will only employ as many people as are needed to produce the salable amount. If this number of employees is below the labor supply, unemployment inevitably occurs. So even though all goods markets are in equilibrium, there is underemployment .

literature

Primary literature

Keynes, J.-M .: General Theory of Employment, Interest, and Money. Duncker & Humblot, Munich / Leipzig 1936; 10th improved edition ibid. Berlin 2000, ISBN 3-428-07985-X