Wednesday, October 30, 2013

The Issue of Unemployment - Part 4 (A Different Angle)

A neo-classical-monetarist in the person of Milton  Friedman believed that a real full employment, as advocated by the old classicists,  may not be attained and thus unemployment may actually exist (He temporarily agreed with Keynes, in this sense). He argued  that  the cause is due to structural factors in the economy rather than natural economic factors. With structural unemployment, Friedman posed that no matter how much money is injected by the government through  public expenditures, the labor market will fail to react because of the structural defects and hence, the new money will just cause inflation. A direct solution of job creation will be fruitless and even detrimental and therefore, it merits that solutions should be geared towards controlling inflation, instead

This view by Friedman is very crucial in the debate because it opened up a more realistic angle. According to him, the structural problems,  may include levels of benefits for the out-of-work, the ease with which workers can change jobs or the social (dis)acceptance of being out of work. Further, unemployment may just be voluntary, that is, anybody not working made a rational choice not to at the prevailing wage.

It may be the realistic touch of  Friedman’s monetarism that prompted many governments to use it in practice. As cited by Stillwell (1993), the governments of Great  Britain under Margaret Thatcher, the United States under Ronald Reagan and Australia has moved towards the monetarist approach  and away from the previous Keynesian approach.   The employment commitment was abandoned and  accepted the more classical notion that the problem is structural hence cannot be contended with.  Policies were then focused on combating inflation  thus tight monetary polices  were put in place.

The results were common among the three economies. Amidst a well-controlled inflation, unemployment went soaring. As reported (Stillwell, 1993)  it reached up to 12 percent in Great Britain..

The  common experience may  be taken as a clear example of what Phillips meant with the trade-off between inflation and employment. However,  it seems that the structural problems have likewise been forgotten when the Keynesian approach was abandoned.

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