Today’s politicians and many economists seldom, if ever, discuss the concept of full employment. It appears that capitalist economies promoted by these politicians and economists are incompatible with full employment. However, full employment is necessary for improving standards of living in capitalist economies.
Full employment is where everyone or nearly everyone wanting to work at the going rate is able to get a job. In the absence of full employment, a permanent state of unemployment prevails and the economy is not maximizing its output.
There are three different types of unemployment: voluntary (by choice), frictional (in between jobs) and involuntary (unable to find work).
Involuntary unemployed are individuals that are not working but actively searching for work, they are distinguished from nonparticipants in the labor force, because nonparticipants, although jobless, are not searching for work.
Involuntary unemployment occurs when the level of physical investment (construction in housing, plants and equipment) is low.
Therefore, involuntary unemployment is about the availability of money in the economy, which creates effective demand, enhancing investors’ returns expectations. It is the expectations of returns that cause physical investments.
Both Karl Marx, architect of socialist system that was embodied in the former Soviet Union, and Milton Friedman, an economist who believed a corporation’s prime responsibility is to increase profits for stockholders, said that when economies are moving towards full employment, capitalists would have to pay higher wages, which reduces profits and causes businesses to fail or lay off workers (involuntary unemployment).
The concept of full employment has been repeatedly redefined to accommodate, in the words of Marx, “the reserve army” of unemployed workers, so capitalists can easily replace the employed. For example, Friedman introduced the term “Natural Rate of Unemployment,” arbitrarily defined as moving percentage of “naturally” involuntary unemployed labor.
However, involuntary unemployment occurs when the money supply falls; and, its incidence depends on the age, sex, color, and skills of individuals. Nonetheless, many politicians and mainstream economists argue that unemployment occurs because the involuntary unemployed are untrained or do not want to work for low wages.
Their narrative ignore the facts, employment, as well as wages, is about physical investment: future capital stock (physical assets) is equal to current capital stock plus net domestic investment. Therefore, when the Federal Reserve (Fed) removes money from the economy, it constrains credit and hence consumption and domestic investment.
In essence, government policies (monetary and fiscal) determine the level of unemployment. Furthermore, when government officials ignore the concept of full employment they facilitate “the reserve army” of unemployed.
Thus, it is difficult to understand why voters continue to reelect politicians (Democrats and Republicans) that are not interested in attaining a full employment economy.
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