Only on Eduzaurus

Keynesian’s View On Unemployment

Download essay Need help with essay?
Need help with writing assignment?
writers online
to help you with essay
Download PDF

The Keynesian unemployment theory emanates from the publication “The General Theory of Employment, Interest and Money” by John Maynard Keynes (Keynes, 1936). This Keynesian unemployment theory is also referred to as “cyclical unemployment”. The unemployment which characterized the great depression in the 1932, it is acclaimed by the classical economists as caused by the refusal of labor to accept money wage reduction. Keynes opposed the classical economic theory by emphasizing that the government should intervene in the managing of the economy because he believed that if the economy is left to correct itself it may take a long time and before then “we are all dead”. The Keynesian theory was developed at the beginning of the “great depression”. He proposed an increase in “Aggregate Demand”; if overall spending is high, there will be increase demand for goods and services then employers are encouraged to produce more and employ more workers to satisfy the additional demand. Invariably aggregate demand reduces unemployment. Unemployment is seen as a deviation from its natural rate (5.5 percent) around which the unemployment rate fluctuates. This is caused by the downturn in the economy.

Classical view on Unemployment

The classical economists believed that unemployment arises due to the obstruction in the functioning of the labour market because they see the market as a “single and static market” which is characterized by “perfect competition, spot transaction and institutions for double auction bidding”. The government should not intervene in the economy because the economy can correct itself in the long run. The labour market consists of quantity of labour demanded and supplied which are brought into equilibrium by the fluctuations in the wage rate; at the point of intersection the equilibrium real wage rate and full employment is determined. There is no incessant unemployment above the frictional level. Unemployment is voluntary, it arises as a result of too high real wages and involuntary can occur if the government requires the employers to pay a minimum wage above the labour market rate. This theory depends on the smooth and fast adjustment of the labour market. The classical model is focused on the supply side while the Keynesian model is focused on the demand side.

Essay due? We'll write it for you!

Any subject

Min. 3-hour delivery

Pay if satisfied

Get your price

Five possible macroeconomic causes of unemployment: first is overpopulation relatively to the physical resources of capital, land and water; second is restrictions on exports to developed countries; third is overvalued foreign exchange rates fourth is low levels of productivity; and fifth is a too high propensity to import.

Restrictions on exports from less developed countries to the developed countries. Since less developed countries have abundant labour relatively to capital such restrictions disadvantage labour relatively to capital. One remembers how at the end of the Middle Ages the conversion of English ar- able lands to sheep farming for the export of wool caused great unemployment and distress. Nevertheless, Hecksher-Ohlin theory by itself is not sufficient to produce unemployment since, if price relations are appropriate, one will have full employment whatever the level of foreign trade may be. If a tendency towards unemployment already exists for the first reason then trade restrictions will make it worse.

We hear that the Russians, the Japanese and the Indians have adapted modern industrial machinery in various ways to use more labour than, say, in Germany or the United States, adapting not so much the industrial processes themselves but more the systems for moving things around.

Russian labor productivity is the lowest, and this explains high unemployment rate throughout the years, which has hurt GDP and production levels. The recession has even caused international trading to decline rapidly, resulting in a global recession and job creation, investment, and promoting global trading are critical.

The self-service technologies are fast changing the conventional way of transacting business by business organisations. The rapid innovation of self-service technologies and its adoption and usages in all facets of human systems is acclaimed to be fast rendering low skilled workers jobless. The major sectors of the economy in advanced economies have reached their peaks and can no longer provide new employment due to an increase in the productivity growth rate as a result of technology advances. These SSTs have in no small measure brought about an increase in productivity growth rate, cost reduction and an increase in the speed of service delivery to customers. This paper examines if self-service technologies truly are the cause of persistent unemployment through a study of the long term metamorphosis of the major economic sectors in advanced economies. This study revealed that the SSTs presents both risks and opportunities.

The definition of unemployment adopted by the 13th International Conference of Labour Statisticians (Geneva 1982): The unemployed can be defined based on three criteria. Those who are not in any kind of paid employment or self -employment. Secondly, those who are available to work either in paid employment or self-employment but who are not in employment within the stipulated period. Thirdly, those who are “actively seeking work” by taking active positive steps by registering in the job agencies, applying for jobs through placement of job adverts on newspaper or internet or seeking assistance from friends or relatives and yet they are unemployed

In addition, based on the resolution adopted at the 19th International Conference of Labour Statisticians, October, 2013 concerning statistics of work, employment and labour underutilization. The definition was extended to include the following

  • future starters, “not in employment” and “currently available” who did not “seek employment” as specified above, because they have already made arrangement to start a job within a short period, set according to the general length of waiting to start a new job in the national context usually not more than three months
  • Those who are undergoing skill training programme or retraining scheme within the employment promotion programmes who on this basis are “not in employment”, “not currently available” and who “do not seek employment” because they have a job offer to start within the three months
  • Those who are “not in employment” expecting or waiting for opportunities to travel (migrate) abroad in order to work for pay or profit

Strifes that may arise from unemployment can cause irreparable harm to children’s brains since they “disrupt the formation of synaptic connections between cells in the developing brain” and affect the blood supply. The early years of a child’s development (between six months and three years of age) are the “foundation of all social problems” they might encounter later in life. Unemployment can thus condemn children to a life of suffering.

Unemployment can be seen as one aspect of human capital whose degradation does not register to the value calculus despite that it strips people of their health, wellbeing, and dignity.

Marrying state and private capitalism can, at least theoretically, resolve the problem of unemployment. However, it does so by ignoring the real problem: the fundamental structure of the very economic system that contributes to the decline of our quality of life by giving rise to problems such as unemployment in the first place. The second solution requires a paradigm change. A brief exposition of the fundamental tenets of capitalism, followed by a critical discussion of these tenets, will pave the road for the proposed paradigm change.

Solution: Post-Capitalism

Wray’s proposal operates within the capitalist paradigm. As such, it requires making no fundamental changes to the economic system. It merely requires state capitalism to function as a subsystem of private capitalism whose sole purpose is to utilize the work force that cannot be absorbed by the latter.

In “Zero Unemployment and Stable Prices”, Randall Wray (1998) pro- poses a solution that requires no fundamental changes to the economic system. Private capitalism can remain unaltered by shifting the problem to state capitalism. Wray accepts that a noninflationary zero unemployment within private capitalism cannot be achieved without state intervention. His solution is to enact a welfare program that would be fully funded by the state. The state would assist private capitalism by acting as “the employer”.

It has been argued that zero unemployment is not only unattainable but also undesirable within capitalism. Given that unemployment has adverse effects on individuals and societies, finding a solution to the problem of unemployment should be one of the primary aims of economic policy. Two solutions were offered. The first works within the confines of the capitalist system it requires instituting welfare policies that alleviate the adverse effects of unemployment. The second involves a paradigm change – it requires replacing capitalism with an alternative economic system that is consistent with a zero rate of unemployment. The latter not only solves the unemploy- ment problem but also a whole host of other problems that arise within capitalism. As such it is superior to the former.

Economists believe that there is an inverse relation between inflation and, what is known as, the ‘natural’ rate of unemployment, which is set by (unregulated) markets in accordance with the law of supply and demand. Inflation is thought to be higher when the rate of unemployment is below the natural rate but lower when the rate of unemployment is above the natural rate. A non-zero rate of unemployment is thus required to maintain low (wage and price) inflation.

The rate of unemployment at which inequality tends to stabilize as the ‘ethical rate of unemployment’. However, such terminology belies the fact that millions of people at any given time are excluded by the capitalist system.

There is also a class dimension to the issue of unemployment since most of the benefits of neo-liberal economic policies tend to go to the top one percent of the population. Between 1979 and 2007, the share of income for higher-income households nearly doubled while the share of income for lower-income households decreased. Income grew by 275 percent for the top one percent’ but only by 18 percent for the bottom 20 percent of households

Thus far, it has been shown that a full rate of unemployment has been historically unattainable. As a result, millions of people remain unemployed at any given time comprising what Marx called the “reserve armies” of unemployed. Unemployment is a serious problem because it significantly lowers overall satisfaction with life and has “mental health consequences that are negative, widespread and sometimes severe”, including depression, anxiety, demoralization, and low self esteem While employment, education, and income have significant effects on good health, negative economic trends tend to increase the total mortality rate.

Too often unemployment affects not only unemployed individuals but also members of their immediate families, especially children. A large number of those who are unemployed tend to have children who are affected both physically and psychologically. Studies in neuroscience reveal that the brains of children who grow up in poverty, a direct result of unemployment, tend to have higher levels of stress hormones than children who grow up in more affluent families. Excessive levels of stress hormones are released as a result and these children will likely turn to abusive smoking and drinking to help deal with the stress.

There is not yet widespread acceptance either of the strong association between personal behaviour and health consequences, nor of the importance of individual responsibility for one’s health.


This essay has been submitted by a student. This is not an example of the work written by our professional essay writers. You can order our professional work here.

We use cookies to offer you the best experience. By continuing to use this website, you consent to our Cookies policy.


Want to get a custom essay from scratch?

Do not miss your deadline waiting for inspiration!

Our writers will handle essay of any difficulty in no time.