In a previous post I highlighted unemployment data which showed that, despite all the business and economic talk of labour shortages, the rates of effective unemployment are higher than in the official ABS headline data and that there remains a problem of entrenched long-term unemployment. However, in policy terms, what we make of the level of unemployment – and what to do about it – is shaped by one’s theoretical starting point (with the following discussion of theory drawn primarily from my reading of Anwar Shaihk’s Capitalism, Competition, Conflict and Crisis).

Theories of Unemployment

Neoclassical

In the neoclassical theoretical model there should be no unemployment because in a perfect market wages would be at the price where the market cleared – that is, the demand for labour matched its supply. Any unemployment is therefore a product of market imperfections (lack of full market knowledge or mobility of resources, or pesky things like minimum wages, unions, government regulation, or welfare payments). While unemployment obviously exists in the real world, this is a “natural” consequence of the departure from the perfect competition and the setting of wages above the level of market clearance (zero unemployment). Unemployment then becomes “voluntary” – an option chosen by society and by individuals where welfare payments allow people not to work at the market equilibrium rate.

For Friedman and others, this “natural rate of unemployment” morphed into the NAIRU – the Non-Accelerating Inflation Rate of Unemployment. In theory, once you approach full-employment, there is increasing competition for labour and the price of labour increases, which drives inflation. But with a certain level of voluntary unemployment, that inflation tendency kicks in below the level below full employment – hence, the effective rate of full employment (or the desired level of unemployment) is the point just before employment “accelerates inflation”.

The graph below shows the Australian Treasury estimates of the rate of NAIRU over the last 40 years, with the pre-pandemic estimate just under 5%. While there are endless arguments about the estimates and the theoretical relationships underlying it, the NAIRU and the need to contain inflation has long been a part of the dominant rationale for maintaining some level of unemployment.

Keynesian

By contrast, those coming from Keynesian and post-Keynesian traditions assume an imperfect market and have a theory that demand drives supply and economic growth. Given that the imperfect market will be below full employment, the government can (and should) via stimulus spending boost aggregate demand up to the point of full employment. Modern Monetary Theory (MMT) fits within this tradition, but adds a jobs guarantee as an additional “automatic” stabiliser (see for instance, Kelton, pg 65-66).

In this context, the persistence of unemployment simply shows that neoliberal governments worried about inflation have not provided enough stimulus to reach the levels of full employment.

Classical

Like many classical (and neoclassical) political economists, Anwar Shaikh believes that such Keynesian stimulus measures can lead to short-term economic boosts, but in the longer term unemployment will return as a natural part of capitalist competition. Marx referred to this as the “reserve army of the unemployed”, but it is not a conspiratorial “disciplining of labour”. Rather, in Shaikh’s view ongoing unemployment is a function of the logical response of profit-driven capital to full employment.

Supply and demand processes suggest that as unemployment falls, there is upward pressure on wages. This negatively impacts on profit rate, which in turn, leads to lower investment which decreases the demand for labour. Alternatively, capital can look to counter this increasing cost pressure by increasing labour supply (by migration or capital flight to source labour overseas), and this increased labour supply will lead to unemployment. Or, in response to rising wages, capital can invest to increase productivity, which displaces labour and creates unemployment. There is no pre-determined path, but ultimately capitalist production is driven by profit not demand, and the self-governing mechanisms of profit-seeking ensure some level of unemployment.

Implications of the Different Theories

There are of course lots of variations within the three broad approaches described above, and I am not going to adjudicate these long-standing theoretical differences here. However, it is interesting to look at the implications of the recent employment data (in my previous post) for different aspects of these theories.

The existence of the sustained and significant unemployment highlighted in my previous post is obviously not consistent with the neoclassical paradigm of a perfect market, but it is compatible with the revised Friedmanite version where less than actual full employment is functionally full employment. Since many of those in long-term unemployment are never going to get jobs (as new labour market entrants out-compete them), the relevant inflationary impact will be at some level of unemployment below 0%.

That said, it is not immediately clear how the official unemployment rate relates to the NAIRU and inflationary pressures if, as we saw in my previous post, 72% of the newly-employed do not come from those who are counted as unemployed. The unemployment rate is simply not measuring the potential labour supply which is purportedly driving wages and prices.

The persistent unemployment data is also consistent with Marx’s notion of a reserve army of the unemployed, but again, the data suggests that most of this reserve army is located outside of the ranks of the unemployed. Shaikh’s analysis of capital’s response to near full-employment may be valid, but it relates more to a labour supply not-in-the-labour-force than to the long-term unemployed, who are more an outside sub-class than part of the reserve army.

But perhaps the biggest challenges of persistent long-term unemployment are posed for post-Keynesian theory and the attempts at government intervention to ensure full employment. At the macroeconomic level, having a cohort of semi-permanently excluded job seekers points to the limits of generic demand-led stimulus strategies. It is not just that there has not been enough stimulus. The barriers faced by many unemployed people may prevent them from winning most of the newly-created jobs (as jobs are filled from outside the labour force). More demand management will not (or not easily) create full employment.

A Job Guarantee

This leads many, particularly in MMT, to argue for more direct government job creation through a job guarantee (with the government or government-funded organisations “employers of last resort”). In theory, this should be good for those entrenched in long-term unemployment. Direct job creation can target disadvantaged groups, and there would be a guarantee of a job that they would probably not get in a competitive market. However, here we are not necessarily talking about people who freely move in and out of jobs as the labour market changes. The jobs need to be created and supported in a way to address the specific needs of those with barriers to employment – which is a difficult and resource intensive task.

This is recognised at least in passing by some proponents of a job guarantee, but much of their description of how such a program might work seems to suggest a workforce moving flexibly in and out of the guarantee program. Moreover, even if people with employment barriers flock to a job guarantee, if sufficient numbers of them can’t go back to the private workforce when demand for labour increases, then the macroeconomic “automatic stabiliser” can’t do its job in adjusting labour supply.

These problems may or may not be solvable, but they do mean that the Keynesian-inspired solutions are not as easy as they are often portrayed.

Other Possibilities

There are of course dangers in focusing on labour “supply-side” issues like the barriers faced by long-term unemployed people. This can and has led to reactionary “victim-blaming” policies, and to surveillance and back-to-work programs which pretend that the problem is a deficit in the unemployed person rather than the labour market.

However, if we take the persistence of long-term unemployment as evidence of systemic unemployment within capitalism, as per the classical (and even the neoclassical) theories, then perhaps we can stop demonising and starving those who are unemployed. We might accept that the labour market can’t provide income for everyone, and actually build support and value them outside the labour market.

This could be an argument for a Universal Basic Income, but it could also simply be an argument for the removal at some point of “job seeking” pretences of current social security payments. This already happens (in a minimum and controlled way) for people over 55 where mutual obligation requirements change after 12 months to basically accept volunteer work instead of employment. But the payment is still called “JobSeeker” rather than, say, a Community Participation Allowance, and in practice it may be closer to a job guarantee than a UBI.

Whatever, any income support (universal or not) needs to be at a level which provides for a minimum healthy standard of living – which clearly is not the case currently. This need to increase payments is not just for humanitarian reasons, but a recognition that the unemployed are the collateral damage of capitalist production (the classical theory) or that they are bearing the cost on behalf of the community of fighting inflation (the neoclassical model).

The acceptance of the inevitability of some level of unemployment may not initially sit well with those interested in equality and the rights of those who are struggling, but it can still have progressive possibilities. And it may be better than simply hoping for a full employment which may not be possible.

Of course, if full employment is possible, accepting less is selling out. That is why the theory matters!