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FULL EMPLOYMENT: THE ROAD NOT TAKEN by Pavlina Tcherneva
It is common knowledge that John Maynard Keynes advocated bold government action to deal with recessions and unemployment. What is not commonly known is that modern “Keynesian policies” bear little, if any, resemblance to the policy measures Keynes himself believed would guarantee true full employment over the long run. This paper corrects this misconception and outlines “the road not taken”; that is, the long-term program for full employment found in Keynes’s writings and elaborated on by others in works that are missing from mainstream textbooks and policy initiatives. The analysis herein focuses on why the private sector ordinarily fails to produce full employment, even during strong expansions and in the presence of strong government action. It articulates the reasons why the job of the policymaker is, not to “nudge” private firms to create jobs for all, but to do so itself directly as a matter of last resort. This paper discusses various designs of direct job creation policies that answer Keynes’s call for long-run full employment policies.
It is understood in mainstream economics that true full employment is neither possible nor desirable. It is not possible due to automation, outsourcing, and other structural shifts in the economy that prevent the market from creating jobs for all who want them. It is undesirable because, even if the government tried to create an adequate number of jobs when the market failed, a pesky inflation problem would cause more harm to the economy than the good those extra jobs would bring. Hence economists consider some NAIRU (non-accelerating inflation rate of unemployment) level of unemployment to be the most one could hope for. The new NAIRU in the U.S. has been placed as high as 6.7% in recent years (Weidner and Williams 2011), which translates into well over 10 million jobless individuals today who want to be part of the productive workforce but are trapped in forced idleness.
The peculiar problem in economics is that policies that would generate and maintain tight full employment over the long run have rarely been tried. “Tight full employment” here is defined as a situation where a job offer at a basic living wage-benefit package is available to anyone who wants one. This is the condition that Nobel Prize winning economist William Vickrey called “chock full employment” (Vickrey 1994), and the great British social reformer William Beveridge identified as the existence of slightly more vacancies than there are job seekers (Beveridge 1944). But the economist who taught us how it could be achieved over the long run was John Maynard Keynes, for whom full employment was a condition of less than 1% of peacetime unemployment (Keynes 1980: 303, emphasis added).
It is common knowledge that Keynesian stimuli are frequent policy tools to deal with recessions and unemployment; what is not commonly known is that modern “Keynesian policies” bear little, if any, resemblance to the policy measures Keynes himself believed would guarantee true full employment over the long run. This chapter aims to correct this misconception and outlines “the road not taken,” i.e., the long-term program for full employment found in Keynes’s writings and elaborated on by others in works that are missing from mainstream textbooks and policy initiatives.
PDF: http://www.levyinstitute.org/pubs/wp_789.pdf
It is common knowledge that John Maynard Keynes advocated bold government action to deal with recessions and unemployment. What is not commonly known is that modern “Keynesian policies” bear little, if any, resemblance to the policy measures Keynes himself believed would guarantee true full employment over the long run. This paper corrects this misconception and outlines “the road not taken”; that is, the long-term program for full employment found in Keynes’s writings and elaborated on by others in works that are missing from mainstream textbooks and policy initiatives. The analysis herein focuses on why the private sector ordinarily fails to produce full employment, even during strong expansions and in the presence of strong government action. It articulates the reasons why the job of the policymaker is, not to “nudge” private firms to create jobs for all, but to do so itself directly as a matter of last resort. This paper discusses various designs of direct job creation policies that answer Keynes’s call for long-run full employment policies.
It is understood in mainstream economics that true full employment is neither possible nor desirable. It is not possible due to automation, outsourcing, and other structural shifts in the economy that prevent the market from creating jobs for all who want them. It is undesirable because, even if the government tried to create an adequate number of jobs when the market failed, a pesky inflation problem would cause more harm to the economy than the good those extra jobs would bring. Hence economists consider some NAIRU (non-accelerating inflation rate of unemployment) level of unemployment to be the most one could hope for. The new NAIRU in the U.S. has been placed as high as 6.7% in recent years (Weidner and Williams 2011), which translates into well over 10 million jobless individuals today who want to be part of the productive workforce but are trapped in forced idleness.
The peculiar problem in economics is that policies that would generate and maintain tight full employment over the long run have rarely been tried. “Tight full employment” here is defined as a situation where a job offer at a basic living wage-benefit package is available to anyone who wants one. This is the condition that Nobel Prize winning economist William Vickrey called “chock full employment” (Vickrey 1994), and the great British social reformer William Beveridge identified as the existence of slightly more vacancies than there are job seekers (Beveridge 1944). But the economist who taught us how it could be achieved over the long run was John Maynard Keynes, for whom full employment was a condition of less than 1% of peacetime unemployment (Keynes 1980: 303, emphasis added).
It is common knowledge that Keynesian stimuli are frequent policy tools to deal with recessions and unemployment; what is not commonly known is that modern “Keynesian policies” bear little, if any, resemblance to the policy measures Keynes himself believed would guarantee true full employment over the long run. This chapter aims to correct this misconception and outlines “the road not taken,” i.e., the long-term program for full employment found in Keynes’s writings and elaborated on by others in works that are missing from mainstream textbooks and policy initiatives.
PDF: http://www.levyinstitute.org/pubs/wp_789.pdf
