“No worker need be unemployed unless there is a deflationary gap”
Unemployment is the existence of a section of the labour force willing and able to work but unable to find gainful employment. A deflationary gap is a period when aggregate demand is too low for the economy to operate at full employment. A deflationary gap (YY1) causes unemployment because demand for goods and services is insufficient to employ everyone and employers will simply cease to hire people. If a worker need not ”be unemployed be unemployed “unless there is a deflationary gap”, it means that all unemployed workers are voluntarily unemployed.
It is important to define what causes this deflationary gap. It occurs due to a fall in one of the four elements of aggregate demand (consumption, investment, government spending and net exports). For example, if the rate of interest is raised, consumption of durable goods and investment will fall as the cost of loans have increased and the benefits of saving have increased. The fall in consumption fill likely lead to a fall in tax revenue (due to a fall in spending on luxury goods) and therefore government spending may fall. This would cause the AD curve to shift left from AD to AD1 leaving a deflationary gap of YY1.
The view that only demand-deficient unemployment (unemployment due to a deflationary gap) is unavoidable is, essentially, the one upheld by the Neo-classical economists. They believe all other types of unemployment are voluntary and therefore they need not be unemployed. The Keynsian economists disagree. In order to determine which view point (if any) is the case, we must first discuss the other types of unemployment.
First, frictional unemployment. This is unemployment caused because people, generally, do not accept the first job they are offered and, in theory choose to remain unemployed – they are ‘between jobs’. This includes people who have left school or further education and have not yet got a job, people who have...