Shifting Sands and Policy Failures
7. The neglected role of aggregate demand 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...
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