Tuesday, November 1, 2011


An economy consists of a labour force of twelve people and two firms. Demand is enough to employ ten people (including the two employers). So there are two unemployed.

Wages are sticky downwards, but prices are flexible. Government is too incompetent to raise aggregate demand. What do do?

One solution is to tell the two unemployed individuals that if they want to continue receiving benefits they have to turn up at an employer’s premises and work part time.

The availability of this new source of free labour would induce the employers to cut the price of their products by enough to raise output by enough to keep the two unemployed people busy. That’s Say’s Law (I think).

That’s not as good as providing full time work for the two unemployed people (assuming they want full time work). But it’s better than having them full time unemployed.

Note that even if unemployment is at NAIRU in this economy (or at the “inflation barrier” as Bill Mitchell calls it), the above system would still work – at least to some extent. Reason is that at NAIRU, employers do not take on the unemployed because of the latter’s unsuitability. So if the employment subsidy involved here makes up for this unsuitability, employment would rise.



No comments:

Post a Comment