Economics After the Crisis by Irene van Staveren

Author:Irene van Staveren [Irene van Staveren]
Language: eng
Format: epub
ISBN: 9781317743071
Publisher: Routledge

8.3.5 Neoclassical economics: voluntary unemployment

Neoclassical labour market theory assumes a positively sloping labour supply function, where higher wages lead to a substitution of paid work with leisure time. And it assumes a downward sloping labour demand function, where additional labour is characterised by a decline in the marginal productivity of labour, and hence, in the value of the marginal product of labour. Together these curves lead to a stable labour market equilibrium with an equilibrium level of employment and an equilibrium wage rate. This equilibrium level of employment is precisely at the level of full employment: there is no involuntary unemployment. That is because employers will hire additional workers assuming that they will be able to sell what these additional workers produce. So, the only brake on hiring workers is the law of diminishing marginal returns: they will stop hiring when their fixed stock of capital no longer allows for the hiring of more workers in order to add value as compared to the costs of these workers.

Hence, in the neoclassical labour market perspective, unemployment can only arise when some of those who supply their labour are not willing to work for the going wage rate. That is why in neoclassical theory, unemployment is regarded as voluntary: these people could find work if only they would accept market level wages. But if there is regulation of the labour market by the state, there is a possibility of unemployment of the involuntary type. Diagram 8.9 shows how a minimum wage can lead to unemployment in the neoclassical perspective.

Diagram 8.9 Labour market equilibrium in neoclassical theory

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