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How Clear Is The Distinction Between Voluntary How Clear Is The Distinction Between Voluntary And Involuntary Unemployment? Voluntary and involuntary unemployment are two concepts in economics that attempt to explain why the economy, even when it is operating at full capacity, still has unemployment. The two concepts are also very useful for trying to explain why, when the economy is not operating at equilibrium, unemployment exists. Before the distinction between the two concepts is assessed, it is necessary to explain them. The labour force consists not only of those who are in work, but also those who are unemployed but able to work for any wage rate.
The supply of labour is the number of people willing to work at any given wage rate. The wage rate used is the real wage rate, which is the level of the wage divided by prices, thus showing the value of the wage in real terms. Voluntary unemployment is also known as the natural rate of unemployment, as it is the level of unemployment when the economy is operating at equilibrium. In figure one, the LF curve shows the labour force, and the LS curve, to the left of it, shows the labour supply curve. The LD curve shows firms? demand for labour at any given real wage rate, and is downward sloping to reflect the fact that the cheaper the cost of labour, the more firms are willing to employ extra labour.
To keep the model simple, the effects of diminishing returns are ignored, although this would result in the curve being convex rather than linear. At the real wage rate (W/P) , employment will be at N . N shows the level of employment if all those in the labour force were to take jobs. Thus, the level of voluntary unemployment will be (N-N ). These people are considered to be out of work due to choice: they are unwilling to work at for (W/P) . ? Included in this definition of voluntary unemployment are those in the transition stage from one job to another, (known as frictional unemployment), and those who are unwilling to take a job due to a mismatch of skills (known as structural unemployment).
Involuntary unemployment, on the other hand, is harder to explain. It occurs when members of the labour force are willing to work at the going wage rate, but are unable to find a job. There are three main models used to describe it: the classical model, the price expectations model, and the Keynesian model. The classical model supposes that real wages are set a level above the rate necessary for equilibrium, usually as a result of negotiations between trade unions and firms.
Firms are therefore only able to employ a smaller number of people at level of real wages, and the demand for labour is thus less than it would be were the market at equilibrium. This is illustrated in figure two. Were the real wage rate at the equilibrium level, shown at point E, there would be full employment with a level of voluntary unemployment at (N-N ). The real price level, though, has been increased to (W/P) 2, giving a level of employment at N 2 (see point F).
The total level of unemployment in this model is now (N-N 2), of which only (N-N ) is voluntary. The remainder is involuntary: workers who would have jobs, were the market at equilibrium. ? Trade unions, though, are not as a large a force in Britain today as they were in the post-war period up to 1979. The model, though, is unaffected by this. Rather than have trade unions negotiate with firms to produce a real wage level above the equilibrium level, this might be achieved through the introduction of a national minimum wage.
It has been argued, though, that as minimum wages only affect a small proportion of the workforce, mainly in the unskilled sectors of the economy which attract young workers, its impact is less than the model suggests. This model, though, suggests that the distinction between voluntary and involuntary unemployment is not as clear as has been suggested. If a trade union, say, accepts a real wage at (W/P) 2, they are deliberately creating involuntary unemployment? for those who are not already working. Likewise, if the effect of the minimum wage is to be assumed to be true, it would also be argued that the government is causing it, too. The expected price model operates at a similar way to the idea of classical unemployment.
Firms and workers negotiate the wage rate based on expectations of future price levels. If these expectations are too optimistic, and the real wage is set too high (for instance at (W/P) 2), then the firm will have to readjust their levels of employment to return to the equilibrium. This model needs to be improved to be of any use when it comes to explaining involuntary unemployment. A time lag has to be introduced, as wage rates are likely to be set out in contracts, and thus cannot be automatically adjusted to changing circumstances. The Keynesian model suggests that involuntary unemployment is caused by a combination of the wage market being sluggish to adjust to conditions and low aggregate demand.
This, coupled with an assumed downwards stickiness in wages and prices (i. e. , they are inflexible), leads to long periods of high unemployment, and prevents the real balance effect (the rise in consumer spending and real income caused by a fall in prices) from taking place. It may be the case that the stickiness of wages is caused by a refusal on either side to accept a wage cut, or it may be contractually hard to enforce one. Keynes considered that there was no automatic tendency in the market to return economy to full employment via the generation of sufficient aggregate demand for goods. If this were boosted by the manipulation of fiscal and monetary policy by the government, in the short run this Keynesian form of unemployment will be reduced. However, the natural rate of unemployment will not be reduced.
This view differs from the classical view, which Pigou among others favoured, which suggested that the greater the rigidity in wage rates, the more employment will fluctuate. This view suggests that the system is always going to have a tendency to be approaching full employment. Involuntary and voluntary unemployment, though, may be not as clearly distinct as has been already suggested. Structural unemployment is a case in point. A former miner may be said to be voluntarily unemployed if he refuses to take a lower paid job in his region, but can the same really be said if the nearest offer of work is 100 miles away?
When faced with the costs of uprooting one? s life are too great, it may be the case that this too can be categorised as involuntary unemployment, albeit not in the classical sense. Perhaps, rather than concentrating on the natural rate of unemployment, it may be more constructive to consider a level which is sustainable. The non-accelerating inflation rate of unemployment (NAIRU) offers a level of unemployment which will not cause, as the name suggests, an increase in inflation.
Sustainable unemployment levels result from negotiations between the two sides, rather than the clearing of the market at equilibrium. Both firms and workers are continually struggling about the amount of real output produced by head, and if their claims are incompatible (i. e. , more is demanded than is available), workers will claim higher wages, and firms will respond by raising prices (which will reduce the real wage). This will cause inflation.
As both sides are negotiating output levels, though, it may argued that they are contributing to involuntary unemployment by deciding on levels which may exclude those willing to work. What might lead to an increase in voluntary unemployment? Voluntary unemployment may be increased in a number of ways. As voluntary unemployment consists of those not willing to work, there may be a number of reasons why they choose to do so. A few examples of what may cause an increase in voluntary unemployment are described below. As mentioned above, structural unemployment, caused by changes in the structure of the economy, does lead to skill mismatch.
If a worker has highly-specialised skills and is made redundant, it is likely he will not take up unskilled work, especially if it is at a lower wage rate or rank than that he is used to. Likewise, those classified under the heading of frictional unemployment are going to try to find work at their level rather than below them. For these reasons it is often argued that too generous levels of benefits or easily available ones are likely to contribute to voluntary unemployment. If the income from benefits is more (or even slightly less) than the income that could be earned from employment, there is less incentive for someone to take a job when they could either continue searching.
Some studies suggest that the threat of losing benefits does have an impact on the level of voluntary unemployment. Regional differences may also cause an increase in voluntary unemployment. It may be too expensive for a worker to move to a different region to get a job. A worker, thus, would rather stay unemployed. Sweden, until the mid- 1980 s, used to offer grants to people moving to a different region as an incentive to find employment elsewhere. This may be a way to get around this problem, but there may be other, non-economic, reasons why people do not move.
In the early 1980 s, it was suggested that high income tax levels reduced the incentive to work, thus stopping the government from maximising its revenues. This was popularly portrayed as the? Laffner Curve? . However, little empirical data exists to suggest that the shape of this curve is as bent as is often suggested: it seems more likely that it is flat across middle bands of tax. Despite this, it may be argued that high taxation offers a disincentive to work, but this may be more of an issue for normative economics. Voluntary unemployment may therefore be increased by a number of circumstances.
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