The Myth of ‘Involuntary Unemployment’

Since layoff is necessary to allow obsolete firms to decline or disappear in favor of new firms that tend to conform to the changes of individual preferences, a frictional unemployment emerges.

Obviously, unemployment caused by regulations (e.g., minimum wage, unemployment benefits, labor unions) is considered as involuntary unemployment. Economists do not deny this. But some still subscribe to the idea that frictional unemployment could be labelled involuntary unemployment as well.

As we will see, this definition of involuntary unemployment does not hold. Though he did not believe in that definition, John M. Keynes gives his own definition, in The General Theory, chapter 2, in writing :

Clearly we do not mean by ‘involuntary’ unemployment the mere existence of an unexhausted capacity to work. An eight-hour day does not constitute unemployment because it is not beyond human capacity to work ten hours. Nor should we regard as ‘involuntary’ unemployment the withdrawal of their labour by a body of workers because they do not choose to work for less than a certain real reward. Furthermore, it will be convenient to exclude ‘frictional’ unemployment from our definition of ‘involuntary’ unemployment. My definition is, therefore, as follows: Men are involuntarily unemployed if, in the event of a small rise in the price of wage-goods [i.e., consumer goods] relatively to the money-wage [i.e., nominal wage], both the aggregate supply of labour willing to work for the current money-wage and the aggregate demand for it at that wage would be greater than the existing volume of employment.

Hazlitt’s direct reply to Keynes reads :

Keynes’s statement overlooks the fact that such an increase of employment could have been brought about equally well by a lowering of money wage-rates, with commodity prices remaining the same. To recognize this possibility, however, would have been to recognize that the unemployment was not in fact involuntary.

(The Failure of the New Economics, 1959, p. 30)

Or Huerta de Soto’s discussion, which is worth quoting in full :

However there are two possible routes to a relative reduction in wages: either a worker may accept lower nominal wages, or he may agree to work in an environment where nominal wages remain unchanged, but the prices of consumer goods rise. The latter is the more indirect route. In neither case is unemployment involuntary: it is purely voluntary in both. In the first, a worker remains unemployed because he voluntarily chooses not to work for a lower nominal wage. In the second, he only agrees to work if he has deceived himself, since his real wages fall even though his nominal wages remain the same. (In other words, in the second case he agrees to work in an environment in which the prices of consumer goods and services increase faster than wages). In fact most of Keynes’s policy prescriptions amount to an attempt to reduce unemployment by lowering real wages via the indirect route of increasing inflation, and thus the prices of consumer goods, while maintaining nominal wages constant. This remedy has failed, not only because workers are no longer fooled by the money illusion and demand nominal wage increases which at least compensate for decreases in the purchasing power of money, but also because the proposed “medicine,” apart from being ineffective, entails the enormous social cost of the economic crises and recessions credit expansion provokes. Furthermore we must realize that to a great extent, Keynes’s own prescriptions, which consist of boosting effective demand through fiscal and monetary measures, are the main culprits in keeping labor markets rigid and even in making them gradually more so, since economic agents, specifically workers and unions, have come to believe that adjustments in real wages must always take the form of increases in the general price level. Hence Keynesian doctrine, rather than a “remedy” for the disease, has become an aggravating factor which worsens it.

(Money, Bank Credit, and Economic Cycles, 2009, p. 554)

And indeed, as Huerta de Soto suggests, insofar as price level is kept increasing over time, even at a low rate, people are obviously reluctant to wage cuts even in normal times, since they could anticipate inflation in the future if they are used to price increases. Thus they would rather choose (nominal) wage increases for which they are accustomed.

The fact that a drop in real wages (due to inflation) could lead to an increase in employment does not mean that those workers were previously willing to work. It could be argued that a drop in real wages allows employers to loosen (even a little bit) the conditions, other than salary, at which they are willing to hire, those conditions at which the previously unemployed were reluctant to accept. But a refusal is a personal choice : “that one can change one’s mind over time hardly implies that one’s earlier choice was involuntary” (Dissent on Keynes, 1992, p. 211). It would make no sense to speak of involuntary unemployment. Also, William H. Hutt, in The Theory of Idle Resources, made the suggestion that when a woman stopped working, for whatever reason, her situation should not be considered as idle, nor as preferred idleness, but as employed. She prefers to do household tasks rather than tasks in a wage-paid job :

… Thus, if a wife leaves the wage-paid labor market when her husband succeeds in earning more, it may be to devote more time to the adequate performance of household services. If so, it would be most realistic to regard her condition not as “preferred idleness” of the leisure variety but as employed, she having exercised a new preference not involving idleness in any sense. More domestic services are purchased at the cost of the wife’s money-income foregone.

(The Theory of Idle Resources, 1939, pp. 40-41 footnote 5)

As William Hutt explained, Keynes did not even understand that what he called “involuntary unemployment” denotes in fact “the condition in terms of willingness to work” (Hutt 1939, pp. 47-48). That is to say, people would not accept a job at any conditions but rather require certain conditions before accepting a job, such as a wage level at which both employees and employers accept. Hutt insists that Keynes failed to differentiate his concept from the determinants of preferred idleness. Ludwig von Mises, in his Human Action, clearly states :

The piling up of excessive inventories and the catallactic unemployment of workers are speculative. The owner of the stock refuses to sell at the market price because he hopes to obtain a higher price at a later date. The unemployed worker refuses to change his occupation or his residence or the content himself with lower pay because he hopes to obtain at a later date a job with higher pay in the place of his residence and in the branch of business he likes best. Both hesitate to adjust their claims to the present situation of the market because they wait for a change in the data which will alter conditions to their advantage. Their hesitation is one of the reasons why the system has not yet adjusted itself to the conditions of the market.

(Human Action, 1996, p. 579)

The various considerations which may induce a man to decide for unemployment can be classified in this way:

1. The individual believes that he will find at a later date a remunerative job in his dwelling place and in an occupation which he likes better and for which he has been trained. He seeks to avoid the expenditure and other disadvantages involved in shifting from one occupation to another and from one geographical point to another. There may be special conditions increasing these costs. A worker who owns a homestead is more firmly linked with the place of his residence than people living in rented apartments. A married woman is less mobile than an unmarried girl. Then there are occupations which impair the worker’s ability to resume his previous job at a later date. A watchmaker who works for some time as a lumberman may lose the dexterity required for his previous job. In all these cases the individual chooses temporary unemployment because he believes that this choice pays better in the long run.

2. There are occupations the demand for which is subject to considerable seasonal variations. In some months of the year the demand is very intense, in other months it dwindles or disappears altogether. The structure of wage rates discounts these seasonal fluctuations. The branches of industry subject to them can compete on the labor market only if the wages they pay in the good season are high enough to indemnify the wage earners for the disadvantages resulting from the seasonal irregularity in demand. Then many of the workers, having saved a part of their ample earnings in the good season, remain unemployed in the bad season.

3. The individual chooses temporary unemployment for considerations which in popular speech are called uneconomic or even irrational. He does not take jobs which are incompatible with his religious, moral, and political convictions. He shuns occupations the exercise of which would impair his social prestige. He lets himself be guided by traditional standards of what is proper for a gentleman and what is unworthy. He does not want to lose face or caste.

… The fact that a worker discharged on account of changes occurring in the arrangement of production processes does not instantly take advantage of every opportunity to get another job but waits for a more propitious opportunity is not a consequence of the tardiness of the adjustment to the change in conditions, but is one of the factors slowing down the pace of this adjustment. It is not an automatic reaction to the changes which have occurred , independent of the will and the choices of the job-seekers concerned, but the effect of their intentional actions. It is speculative, not frictional.

(Human Action, 1996, pp. 598-600)

Because a man is not omniscient, the equilibrium is not achieved automatically. This is the very reason why wages need time to adjust even without regulations (e.g., minimum wage, unemployment benefits, labor unions). If agreement did not take place, this would mean that employees have pretentions (to better pay or working conditions) that employers do not accept : “He judges that the search for a better opening is worth the risk of immediately foregone income” (Hutt 1939, p. 24). The popular idea that employees have no bargaining power over the employer is debatable, as discussed earlier :

‘Minimum Wage Laws Increase Unemployment’ : A Misunderstanding

But even on the extreme assumption that the wage workers tend to accept is not sufficient to avoid starvation, the unwillingness to accept this wage reflects one’s desire even though people have no reason to refuse a wage-paid work in that situation : “Those seeking employment would be ready to go to work for any wages, however low, even if insufficient for the preservation of their lives. They would be happy to delay for awhile death by starvation.” (Human Action, p. 136).

It could be said however that the lack of information about job opportunities makes it more difficult to find a job. Again, this idea neglects the very heart of the entire matter. As discussed above, unemployment in an unhampered economy is necessarily speculative, therefore voluntary. What individuals really want is not a job per se, but a job at a certain wage, which reflects the condition in terms of willingness to work. Then, Rothbard writes :

For if what a man wants is simply a “job,” he could work for zero wages, or even pay his “employer” to work for him. In other words, he could earn a “negative wage.” Now this could never happen, for the good reason that labor is a disutility, especially as compared to leisure or “play.” Yet all the worry about “full employment” makes it appear that the “job,” and not the income from the job, is the great desideratum. If that were really the case, then there would be negative wages, and there would be no unemployment problem either. The fact that no one will work for zero or negative wages implies that in addition to whatever enjoyment he receives, the laborer requires a monetary income from his work. So what the worker wants is not just “employment” (which he could always get in the last resort by paying for it) but employment at a wage.

(Man, Economy, and State, 2009, p. 583)

Thus, that there are information asymmetries do not imply that we should accept the concept of involuntary unemployment. To say otherwise would mean that any failure to concur with someone else is necessarily involuntary. Hans Hermann Hoppe highlights the complete nonsense of this idea :

The claim that involuntary unemployment is possible in the framework of a private property economy as characterized above is due to an elementary logical-conceptual confusion: It ignores the fact that employment is a two-party affair; i.e., an exchange which, like any voluntary exchange, can only take place if it is deemed mutually, bilaterally beneficial. It makes no more sense to classify someone as involuntarily unemployed if he cannot find anybody willing to meet his unilaterally fixed demands for employment, than to call a person in search of a wife, a house, or a Mercedes involuntarily wifeless, homeless, or Mercedesless because no one wants to marry him or supply him with a house or a Mercedes at terms which this person has unilaterally determined as agreeable to him. Absurdity and contradiction would result if one were to do so. For then one would not only have to accept, as the other side of the same coin, that the boycotting employer, woman, or owner of a house or a Mercedes in turn would have to be regarded as an involuntary nonemployer, nonwife, or nontrader of a house or a Mercedes because his/her unilateral demands had not been met by the would be employee, would-be husband, or would-be house or Mercedes owner just as much as they had not met his. Moreover, with both the would-be employee as well as the would-be employer classified as involuntarily being what they are because no mutual agreement had been reached between them, to create “voluntary employment” would imply coercing either one or both parties to accept an exchange whose terms one or both of them regard as unacceptable.

(The Economics and Ethics of Private Property, 2006, pp. 141-142 footnote 7)

What Keynes would meant by involuntary unemployment does not matter since we have shown in what the concept of “involuntary unemployment” is meaningless. Unemployment, as well as employment, is necessarily voluntary in a free market economy. To put it another way, unemployment is not a concern in an unhampered economy.

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