Full Employment

When effective demand is deficient, there is underemployment of labour.

• Men are unemployed but are willing to work at less than the existing real wage.

Consequently, as effective demand increases, employment increases.

• But it rises at a real wage equal to or less than the existing one.

This happens until there is no surplus of labour available at the then existing real wage.

• No more men (or hours of labour) are available unless money-wages rise (from this point onwards) faster than prices.

Up to this point, the decreasing return from applying more labour has been offset by the acquiescence of labour in a diminishing real wage.

• But after this point, a unit of labour would require more products while yielding fewer output.

Strict equilibrium requires wages, prices, and consequently profits to all rise in the same proportion as expenditure.

• The “real” position, including the volume of output and employment, are left unchanged in all respects.

This is a situation where the crude quantity theory of money (interpreting “velocity” to mean “income-velocity”) is fully satisfied because:

• output does not alter
• prices do not rise in exact proportion to MV.

These have the following conditions:

1. For a time at least, rising prices may delude entrepreneurs into increasing employment beyond the level which maximises their individual profits measured in terms of the product.

For they are so accustomed to regard rising sale-proceeds in terms of money as a signal for expanding production, that they may continue to do so when this policy has in fact ceased to be to their best advantage; i.e. they may underestimate their marginal user cost in the new price environment.

2. Since that part of his profit which the entrepreneur has to hand on to the rentier is fixed in terms of money, rising prices, even though unaccompanied by any change in output, will re-distribute incomes to the advantage of the entrepreneur and to the disadvantage of the rentier, which may have a reaction on the propensity to consume.

This, however, is not a process which will have only begun when full employment has been attained; — it will have been making steady progress all the time that the expenditure was increasing.

If the rentier is less prone to spend than the entrepreneur, the gradual withdrawal of real income from the former will mean that full employment will be reached with a smaller increase in the quantity of money and a smaller reduction in the rate of interest than will be the case if the opposite hypothesis holds.

After full employment has been reached, a further rise of prices will, if the first hypothesis continues to hold, mean that the rate of interest will have to rise somewhat !o prevent prices from rising indefinitely, and that the increase in the quantity of money will be less than in proportion to the increase in expenditure; whilst if the second hypothesis holds, the opposite will be the case. It may be that, as the real income of the rentier is diminished, a point will come when, as a result of his growing relative impoverishment, there will be a changeover from the first hypothesis to the second, which point may be reached either before or after full employment has been attained.

IV

The apparent asymmetry between Inflation and Deflation is a little perplexing.

A deflation of effective demand below the level required for full employment will diminish employment as well as prices.

An inflation of it above this level will merely affect prices.

This asymmetry merely reflects the fact that while labour is always in a position to refuse to work on a scale involving a real wage which is less than the marginal disutility of that amount of employment, it is not in a position to insist on being offered work on a scale involving a real wage which is not greater than the marginal disutility of that amount of employment.

Author’s Footnotes

1. Those who (rightly) dislike algebra will lose little by omitting the first section of this chapter.

2. For, if pwr is the expected price of a unit of output in terms of the wage-unit, ΔDwr = Δ (pwrOr) = pwrΔOr + OrΔpwr = (Dwr/Or). ΔOr + OrΔpwr , so that OrΔpwr = ΔDwr (1 - eor) or ΔDwr = OrΔpwr/(1 - eor) . But OrΔpwr = ΔDwr - pwrΔOr = ΔDwr - (marginal prime cost) ΔOr = ΔP. Hence ΔDwr = 1/(1 - eor). ΔPr . 3. For, since Dwr = pwrOr, we have 1 = pwr. dOr/dDwr + Or.dpwr/dDwr = eor - (Nrφ’’(Nr)/{φ’(Nr)}2).eor/pwr . 4. For, since p = pw.W and D = Dw.W, we have Δp = WΔpw + (p/W) . ΔW = W. e’p.(pw/Dw).ΔDw + (p/W).ΔW = e’p(p/D)(ΔD - (D/W)ΔW) + (p/W)ΔW = e’p(p/D).ΔD + ΔW(p/W)(1 - e’p) , so that ep = DΔp/pΔD) = e’p +(D/pΔD).ΔW.p/W).(1 - e’p) = e’p + ew(1 - e’p) = 1 - eo(1 - ew)