Full Employment Abandoned

Full Employment Abandoned

Shifting Sands and Policy Failures

William Mitchell and Joan Muysken

This book dismantles the arguments used by policy makers to justify the abandonment of full employment as a valid goal of national governments. Bill Mitchell and Joan Muysken trace the theoretical analysis of the nature and causes of unemployment over the last 150 years and argue that the shift from involuntary to ‘natural rate’ conceptions of unemployment since the 1960s has driven an ideological backlash against Keynesian policy interventions.

Chapter 3: The Phillips Curve and Shifting Views on Unemployment

William Mitchell and Joan Muysken

Subjects: economics and finance, labour economics


3.1 INTRODUCTION In the pre-Keynesian era, unemployment was considered to be a voluntary state and full employment was thus defined in terms of the employment level determined by the intersection of labour demand and labour supply. So by construction, full employment reflected the optimal outcome of maximising, rational and voluntary decision making by workers and firms. At the so-called ‘full employment real wage’, any worker wanting work could find an employer willing to offer the desired hours of employment and any employer could fill their desired offer of hours from the services of willing employees. Subsequently, in the immediate post-Second World War Keynesian era, full employment was refocused to emphasise the provision of enough jobs to match the preferences of the labour force. Any remaining unemployment (frictions aside) was considered involuntary and due to the failure of the monetary economy to generate demand sufficient to meet the savings preferences of the private sector. The turning-point in the abandonment of this concept of full employment came in the 1950s when the discussion turned to inflation and the trade-off between the twin evils of unemployment and inflation. This era was exemplified by the emergence of the Phillips curve literature. In the previous chapter we showed that the trade-off between inflation and unemployment has been a subject of discussion since the time of the classical economists, but it never had a prominent place in the debate. This changed in the 1950s once the Phillips...

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