By Daniel M. Ryan
One of the most notorious bugaboos in economic theory is the "assumption" of "full employment." Out of the need to be precise, economic theorists include this assumption as a postulate in their theoretical constructs. It takes the place of the old-fangled assumption, "markets clear." This postulate, needless to say, has been jumped on by most every critic of the free market, including many whose own employment depends upon this assumption being generally seen as "unrealistic."
There has been a veritable mountain of literature and thought based upon the different postulate, "assume that ‘full employment' is hardly ever reached." Is it covering a molehill? In order to answer this question, "full employment" has to be examined to see how precise it is, and how closely the everyday workings of the economy match it.
As far as full employment of all goods and services are concerned, the concept is very vague, indeed, from a surface glance. This is easiest to see with respect to consumer goods. How much "idle capacity" do your best leather shoes (if you have any at all) have with respect to their use, based upon your own use of them? How about your phone? Your oven, if you also have a microwave? Or the reverse?
With respect to durable consumer goods, the universal existence of "idle capacity" is almost universally recognized. Thus, it could be concluded that my warm-up is little more than quibbling. I should know what "idle capacity" means, even if such knowledge does ignore the long tail, which in this context identifies a region where capital goods are sometimes used as consumer goods and vice-versa. It would seem unprofessional and degrading for the owner(s) and/or employees of Big Lawn Care to use its lawnmowers for personal use, but a fellow with a lawnmower and a landscaping business without employees might very well disagree with that rule.
Even with respect to a firm whose capital goods are never, or hardly ever, used for consumer-good purposes, there is still idle capacity existent, from the time the firm itself closes up for the night (or the weekend) to the time it opens back up. Between those times, the capacity is idle. 24-hour stores, and three-shift mining spurts during boom times, indirectly show it.
So what, then, is less-than-full-employment of capital goods? The nit-picking so far, with respect to pure capital goods, indicates that the extent of idleness in capacity is mediated by demand. Few stores are open 24 hours a day because the demand for their services, during their off-hours, is at least presumably insufficient to rate the expenses associated with using their capital goods, including their locations. It's hard to avoid the conclusion that there always is lots of "idle capacity," except in certain unusual situations and times. This results from demand putting a brake on production. It looks like the conclusion that there is "idle capacity" everywhere has only led to the discovery of the influence of demand. I seem to have reasoned my way right back to high-school-level economics, where the supply and demand curves are introduced.
Adding the re-discovery of what I learned in grade twelve to the above quest gives another hypothesis: "idle capacity" results from overestimation of demand, at a specific point in time. This implies that "idle capacity" is somewhere between fully-employed capital goods and ones destined for salvage. In an economy where the potential for error exists, there is bound to be some "idle capacity." Unlike the first attempt, this definition leaves open lots of room for "capacity shortages," resulting from underestimation of demand at certain points in time.
Of course, remembrance of the supply and demand curves also brings with it a remembrance of the importance of prices. Capacity idled might very well change into capacity fully used if the price of the product is dropped. Of course, with respect to firms, there is very little point in making a fetish out of "full capacity" if it results in losses. In fact, if the exercise of full capacity for the production or use of any good or service results in loss, or opportunity loss net of benefit, then there will definitely be a "capacity surplus" with respect to it. That's why most durable consumer goods are valued based on their availability.
So, once again, we're back to the intersection of supply and demand, only this time, with respect to inputs that have to be used to obtain the outputs. Adding time, though, introduces another factor: variance of demand over time. What if demand unexpectedly drops? This would result in the emergence of "idle capacity" if the affected supplier(s) was/were running at full capacity previous to its occurrence.
Any such drop may be seasonal; it may result from a shift in the general economy; it may result in a shift of tastes. The mere existence of "idle capacity" tells you nothing about which cause of it is which.
Thus, there should be little need to wonder why "full employment of resources" is so nebulous. I didn't even bring up the problematic case of submarginal resources (at a certain price vector), or the problem of inventories. When it comes down to it, the definition of "full employment of resources" is so vague, that an indicator of it may be as simple as "no-one is complaining about business being bad as of now." An indicator as crude as this one is easily susceptible to being gamed, needless to say.
It should therefore be of little surprise that "full employment of resources," in applied economics, amounts to "normalcy". Finding norms and deviations from them is, after all, the heart of statistical econometrics. After the above meander, we have reached the conclusion that the assumption of "full employment of resources" means "the economy is ticking along normally." What a daring assumption this is!
Of course, the bugbear in the term "full employment" comes from adding the labour market. It's an unfortunate fact that the development of the theory of labour economics was hobbled by a non sequitur, which opened up scope for a large burst of moralizing. It is the fallacious conclusion that "voluntary unemployment" implies that someone somewhere is lazy.
"All unemployment is voluntary" is a postulate of technical economics. It does not mean that "everyone is working as hard as he or she is capable of." Deliberately confuting the two quickly leads to paradoxes.
A techno-geek still in high school is offered a full-time, permanent office job as a webmaster, and he or she turns down the offer because he or she would rather get a diploma on schedule. According to the technical use of the term, that student is, at that moment, "voluntarily unemployed." He or she had a job offer, which would have put him or her into the labour market, and has turned it down, preferring to stay out of the labour market. How does this imply that such a person is lazy?
From the strict use of the technical term, such a student won't work, because he or she had turned down a job offer and stayed out of the labour market. In everyday-life terms, such a student can't work, because doing so would require him or her to be in two places at once. The only way out of this dilemma is the existence of a night-school rescue, one which both required minimal homework time and bestowed a degree of the same quality, available to him or her.
So: if the two terms are mixed together, barring that rescue, what we have is a student who both could and can't work, an obvious absurdity.
A more notorious example, used to justify the conflation of "voluntarily unemployed" with "lazy," is the synecdoche-term "welfare bum." Unfortunately, to make a moral case using conventional standards out of this example, it has to be further shown that such "welfare bums" are in fact lazy, that they're up to nothing that isn't no good (morally speaking.) Since this is a positive claim, the onus for its substantiation is on the proponent of it. It has to be shown by the proponent that people on social assistance don't work at anything, including self-improvement regimens and/or volunteer work. There is indirect evidence that the typical welfare recipient is not as "lazy as sin," as revealed by the fact that implementation of workfare reform programs in the past decade, post enactment, have been uncontroversial. There were hardly any "lazy person's attitudes" erupting.
If a moral argument is constructed that concludes, or postulates, that any recipient of government largesse is ipso facto immoral, then such an argument has to include every beneficiary. How does a professor whose grants come from the government differ, generally, from a welfare recipient who volunteers part-time at the food bank? Both match work to largesse, don't they? Note also that this argument also excludes anyone who chooses to "bum around" on his or her savings, and fades into partial irrelevance when prior individual payments of taxes to the dispensing authority are worked in.
All examples can be questioned in this manner, until we've whittled them down to a figure that suspiciously resembles a devil figure. Once discarded, and once grade-twelve economics is added in, the postulate that "all unemployment is voluntary" amounts to "everyone who seeks a job can find one, unless all jobs available to him or her aren't worth the opportunity cost attached to them." These opportunity costs include not only prior commitments, but also a factor that every economic agent uses: the decision whether or not a transaction is "worth it" at a specified price. Why should the labour market be magically devoid of the incentives that appear in all other markets? Suppliers of labour are like suppliers of any other service; if an exchange isn't worth it (net of opportunity cost), then it won't be entered into. There are some situations where being "voluntarily unemployed" is economically rational. How else would a labour market be pulled up to an equilibrium-level wage rate from a sub-equilibrium-level wage rate?
Once the moralizing has been exorcised from labour-market analysis, "unemployment" becomes just as problematic a term as "idle capacity" is, if both terms are stripped of context. A normal person is, after all, awake for approximately eighteen hours a day, seven days a week – and some people ain't normal, for whatever reason. Once again, the putting aside of supply and demand, as well as benefits and costs, leads to a slow swirl into confusion, if the shell of the remaining term is examined rigorously.
In real applied labour economics, as with all applied economics, it's normal to use norms. Thus, assuming "full employment" means assuming that the labour market is working normally.
It is true, when pure theory is used, that "assuming full employment" means assuming away everyday uncertainty and ignorance, an assumption that is unrealistic on the face of it. But, as long as the codicil is included that real economies, full of real people chasing real incentives and balancing them against real costs, tend towards the final state of equilibrium, it's hard to see why the reasoning based on such assumptions should be confined to a professor's blackboard – or molehill.
Get weekly updates about new issues of ESR!