Shifting Sands and Policy Failures
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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