Unemployment in Ireland

Alternative Perspectives

Charles Clark, Catherine Kavanagh

• Publisher: Routledge
• Year: 2019
• Print ISBN:
  9781138360495
• eBook ISBN:
  9780429769450
• Topic: Negocios y empresa
• Subtopic: Negocios en general

Published in 1998, this book looks at unemployment in Ireland, the country's most serious social and economic problem. It is the major contributor to poverty, exclusion and social decay. This book contributes to the growing debate on the unemployment problem in Ireland. It is the first academic collection of papers on this issue and contains contributions from some of Ireland's most respected economists. It offers alternative views of the Irish labour market, with these views shedding light on many aspects of the unemployment problem, including exchange rates influences, aggregate demand analysis, labour market policies and the historical perspective. Since this book assesses the problem of unemployment from different perspectives, it should widen the discussion of this most serious issue.

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Unemployment in Ireland: a post-Keynesian/institutionalist perspective

Charles M. A. Clark

Ireland’s dual unemployment problem

The current level of unemployment in Ireland is both the result of the general level of labour slack in the advanced capitalist economies and of the specific historical and social context of the Irish economy. To understand the current labour slack and to design policies to fight high unemployment, it is necessary to address both sets of factors.

Unfortunately, the greatest barrier to reducing world unemployment is the very “science” which is charged with explaining and leading the fight against unemployment: economic theory. The current high levels of unemployment in the OECD countries, and the inability of the economics profession, or at least mainstream economists, are both the effects of the same cause: the economics profession’s adherence to a pre-Keynesian view of the workings of capitalist economies.

Therefore, in order to get a clear idea of the economic, social and political forces behind the now decade long era of high unemployment we must, as Keynes suggested 50 years ago, again start the “long struggle of escape … from habitual modes of thought and expression” (Keynes, 1936, p. viii). To aid in this endeavour, it will be helpful to briefly examine the neoclassical theory of unemployment, or more accurately the neoclassical theory of explaining away unemployment, and to contrast it with the post-Keynesian/institutionalist view.

Neoclassical and post-Keynesian/institutionalist views of unemployment

The two approaches to unemployment and the labour market to be considered here are the neoclassical market clearing model and the post-Keynesian/institutionalist (PKI) approach.¹ The neoclassical market clearing model is built upon pre-Keynesian economic theory, while the PKI approach builds on the insights of John Maynard Keynes, combined with the institutionalist’s emphasis on historical and social context (institutions).²

Neoclassical perspective

Neoclassical economic theory treats the labour market in the same way that it analyses all markets, as the arena which co-ordinates the rational self-interest actions of individual economic actors. The buying and selling of labour is the same as the buying and selling of any other good or service, with its price (the real wage) being determined by the interaction of supply and demand. In the event that quantity supply and quantity demand are not equal, i.e. not in equilibrium, then the price of labour (the real wage) will adjust upward (to alleviate a shortage of labour) or downward (to alleviate a surplus) in order to re-establish the equilibrium market clearing price. The most important features of this theory are its market clearing assumption and its determination of factor prices. Market clearing is the process which leads to zero excess supply, which for the labour market means the existence of no involuntary unemployment.³ This process is worked out through adjustments in relative prices (as described above), which, for the labour market to clear, entails the real wage, the return on capital (profit rate) and the rate of interest.

Both the supply and the demand for labour, according to this theory, are functions of the real wage. The supply of labour is based on the utility maximisation model. Individuals have preferences: they like income, they dislike work, and they like leisure. The decision to work (i.e. supply labour) is based on the labour/leisure trade-off, with the individual maximising her utility by choosing the level of labour supply which equates the marginal utility of income earned from an additional unit of work with the marginal disutility of an additional unit of labour (which is the same as saying giving up a unit of leisure). The real wage is the price signal, which the individual reacts to, i.e. it is the measure of the “utility” received from work.

The demand for labour is a similar utility maximising story, this time from the perspective of the firm (the employer). The firm wants to maximise revenue over costs. It will hire workers as long as the revenue generated by the worker (the marginal revenue product) is greater than the cost of hiring the worker (the real wage). Assuming diminishing returns to scale, at some point the additional revenue generated by additional employees falls, so that the firm will only hire additional employees if the real wage falls. The market demand for labour is the sum of all individual firms’demand for labour. Thus, there is an inverse relationship between the real wage and the demand for labour. The net result of this approach is that unemployment is either voluntary or due to barriers to flexible wages that would produce full employment. In effect, this theory has eliminated Keynesian involuntary unemployment.

Any deviation from full employment, if it persists beyond the short run, must be due to some market imperfection, with the most common being government intervention and the influence of trade unions. The obvious policy implication of this theory is to deregulate labour markets, that is, move them closer to the perfect competition model. Most neoclassical economists argue that making labour markets more flexible is the primary way for the government to promote employment.

The neoclassical theory of the labour market is supplemented by various versions of “Say’s Law of Markets”(that is a natural level of output). Although the presentation of the new classical and new Keynesian macroeconomics is certainly more rigorous than Jean-Baptist Say’s presentation of his theories, the fundamental proposition of a tendency of the economy to a “natural level of output” remains the same. The influence of the neoclassical pre-Keynesian perspective can be seen in the modelling of “wage equations” in an effort to discover what factors are preventing the real wage from reaching its full employment level. This whole approach is based on the assumption of a unique relationship between wage rates and levels of unemployment. From this proposition, it is only a short step to the theory that has dominated macroeconomic theory over the past three decades: that there is a unique relationship between the level of unemployment and inflation, an idea which started out as the “Phillips Curve,’’evolved into the “natural rate” hypothesis and which is now called the “NAIRU” (Non-Accelerating Inflation Rate of Unemployment). The main purpose of this theory, along with the “rational expectations hypothesis” is to reassert the classical proposition of a vertical aggregate supply curve. The radical nature of Keynes’suggestion that the level of output adjusts to the level of aggregate demand, and has no level of central tendency, stems from its attack on the whole notion of equilibrium. It is an assertion that the economy does not possess dominant and persistent forces, which lead to a general equilibrium at a socially optimal level. That is, that the Invisible Hand doesn’t work, and that social...

Table of contents

• Cover
• Half Title
• Title
• Copyright
• Contents
• List of tables and figures
• List of contributors
• Acknowledgements
• Preface
• 1 Unemployment in Ireland: a post-Keynesian/institutionalist perspective
• 2 Unemployment, non-participation and labour market slack among Irish males
• 3 A review of the role of active labour market policies in Ireland
• 4 Comment
• 5 Education, deprivation, hysteresis, unemployment
• 6 Male long-term unemployment and structural employment changes in Ireland
• 7 Irish unemployment in a European context
• 8 Does the exchange rate regime affect the unemployment rate?
• 9 Comment