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 7: The Neglected Role of Aggregate Demand

William Mitchell and Joan Muysken

Subjects: economics and finance, labour economics

Extract

7.1 INTRODUCTION In Chapters 4 and 5 we discussed some of the major theoretical or conceptual challenges that have been made against the NAIRU and its use in the policy arena. In this chapter we examine more closely the empirical anomalies that lead one to reject the basic underpinnings of the full employability framework. In particular we focus on the role that aggregate demand plays in employment generation and unemployment. We are reminded of the warning from Beveridge (1909: 3): ‘the inquiry must be one into unemployment rather than into the unemployed’. In this regard, we argue that the overwhelming empirical evidence supports the notion that persistent unemployment and underemployment has been produced by systemic macroeconomic failures, rather than intrinsic flaws in the individuals who have fallen victim to the failure of economies to produce enough hours of work. Freeman (2005: 138) provides an entrée into the rest of the chapter: What explains strong adherence to a claim whose empirical support is ‘fragile’, ‘mixed’, ‘contingent on factors that need to be clarified’, and so on? The best interpretation I can give is that these economists come to the problem of explaining unemployment with the prior that markets work well absent interventions, and thus that the right place to look for causes of problems is at institutions that may impede the operation of the markets. They have fairly tight bands around this prior, so that it dominates weak evidence, and thus produces posteriors close to the priors, as in...

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