Involuntary unemployment due to instability of the economy and fiscal policy for full-employment: A theoretical foundation for MMT (modern monetary theory)

Tanaka, Yasuhito (2021): Involuntary unemployment due to instability of the economy and fiscal policy for full-employment: A theoretical foundation for MMT (modern monetary theory).

Abstract

The existence of involuntary unemployment advocated by J. M. Keynes is a very important problem of the modern economic theory. Using a three-generations overlapping generations model, we show that the existence of involuntary unemployment is due to the instability of the economy. Instability of the economy is the instability of the difference equation about the equilibrium price around the full-employment equilibrium, which means that a fall in the nominal wage rate caused by the presence of involuntary unemployment further reduces employment. This instability is due to the negative real balance effect that occurs when consumers’ net savings (the difference between savings and pensions) are smaller than their debt multiplied by the marginal propensity to consume from childhood consumption. Also we present a discussion about fiscal policy by seigniorage to realize full-employment. We present a theoretical foundation for the so-called MMT (modern monetary theory).

• Item Type: MPRA Paper
• Language: English
• Keywords: overlappling generations model, involuntary unemployment, instability of the economy, negative real balance effect, fiscal policy by seigniorage
• Subjects: E - Macroeconomics and Monetary Economics > E1 - General Aggregative Models > E12 - Keynes ; Keynesian ; Post-Keynesian; E - Macroeconomics and Monetary Economics > E2 - Consumption, Saving, Production, Investment, Labor Markets, and Informal Economy > E24 - Employment ; Unemployment ; Wages ; Intergenerational Income Distribution ; Aggregate Human Capital ; Aggregate Labor Productivity

References

G. Akerlof and J. L. Yellen. Efficiency Wage Models of the Labor Market. Cambridge University Press, 1986. O. J. Blanchard and L. H. Summers. Hysteresis and the european unemployment problem. NBER Macroeconomics Annual, 1986. O. J. Blanchard and L. H. Summers. Hysteresis in unemployment. European Economic Review, 31: 288–295, 1987. G. D. Hansen. Indivisible labor and business cycle. Journal of Monetary Economics, 16:309–327, 1985. L. F. Katz. Efficiency wage theories: A partial evaluation. NBER Macroeconomics Annual, 1986. M. Lavoie. Efficiency wages in Kaleckian models of employment. Journal of Post Keynesian Economics, 23:449–464, 2001. A. Lindbeck and D. J. Snower. Wage setting, unemployment, and insider-outsider Relations. American Economic Review, 76: 235–239, 1986. A. Lindbeck and D. J. Snower. Efficiency wages versus insiders and outsiders. European Economic Review, 31: 407–416, 1987. I. M. McDonald and R. M. Solow. Wage bargaining and employment. American Economic Review, 71:896–908, 1981. M. Otaki. The dynamically extended Keynesian cross and the welfare-improving fiscal policy. Economics Letters, 96:23–29, 2007. M. Otaki. A welfare economics foundation for the full-employment policy. Economics Letters, 102:1–3, 2009. M. Otaki. The aggregation problem in the employment theory: The representative individual model or individual employees model? (https://www.scirp.org/journal/paperinformation.aspx?paperid=25920). Theoretical Economics Letters, 2:530–533, 2012. M. Otaki. Keynsian Economics and Price Theory: Re-orientation of a Theory of Monetary Economy. Springer, 2015. S. J. Schreiber, K. J. Smith, and W.M. Getz. Calculus for the Life Sciences. John Wiley & Sons, 2014. C. Shapiro and J. E. Stiglitz. Equilibrium unemployment as a worker discipline device. American Economic Review, 74:433–444, 1984. Y. Tanaka. Involuntary unemployment with indivisible labor supply under perfect competition. Economics Bulletin, 40:1914–1923, 2020a. Y. Tanaka. Indivisible labor supply and involuntary unemployment: monopolistic competition model. Singapore Economic Review, forthcoming, 2020b. T. Umada. On the existence of involuntary unemployment (hi-jihatsuteki-shitsugyo no sonzai ni tsuite (in Japanese)). Yamaguchi Keizaigaku Zasshi, 45(6):61–73, 1997. J. L. Yellen. Efficiency wage models of unemployment. American Economic Review, 74: 200–205, 1984. E. Schlicht. Efficiency wages: variants and implications. IZA World of Labor, 2016. (doi:10.15185/izawol.275) W. Mitchell, L. R. Wray, and M. Watts. Macroeconomics. Red Globe Press, 2019.