Involuntary unemployment is the situation of people who are willing and able to work at the wage that similar workers are being paid, yet cannot find a job. They are not holding out for better pay or a better role; there simply are not enough jobs at that wage for everyone who wants one. The idea implies that the labor market does not always clear the way a simple supply and demand diagram suggests.
The term is most closely linked to John Maynard Keynes and to Keynesian economics, which argued in the 1930s that mass unemployment was not a choice made by workers. It is contrasted with voluntary unemployment, in which people turn down available work. Whether involuntary unemployment can persist in equilibrium has been one of the longest-running debates in macroeconomics.
Involuntary unemployment in plain terms
Think of a game of musical chairs where everyone is happy to sit on any chair, at the same "price". When the music stops, some players are left standing. They did not refuse a seat; there were just fewer chairs than players. Offering to sit on a slightly worse chair does not help if no extra chairs appear.
Involuntary unemployment works the same way. People are ready to take a job at the usual pay, but employers are not hiring enough. Lowering their asking pay may not create new jobs quickly, because pay is not adjusting fast enough, or because employers have reasons to keep it where it is.
Keynes and the classical view
Before the 1930s, classical economics held that if wages were free to fall, the labor market would clear: anyone wanting work at the market wage would find it, and remaining unemployment would be either frictional or voluntary. Say's Law suggested that general shortfalls of demand could not last.
The Great Depression challenged that view. In The General Theory of Employment, Interest and Money (1936), Keynes argued that unemployment could stay high because total spending, or aggregate demand, was too low. He also argued that cutting money wages might not help: lower wages reduce workers' incomes and spending, and if prices fall too, real wages may not change much. For Keynes, involuntary unemployment was a demand problem that called for fiscal policy and lower interest rates.
Why wages may not fall to clear the market
Later economists offered reasons why wages stay above the level that would hire everyone, so involuntary unemployment can last:
- Efficiency wages. Firms may pay above the market rate to keep staff motivated, reduce quitting and attract better applicants. In the Shapiro–Stiglitz model (1984), unemployment acts as a discipline device that discourages shirking. Joseph Stiglitz shared the 2001 Nobel prize for work on markets with asymmetric information.
- Insiders and outsiders. Assar Lindbeck and Dennis Snower argued that employed "insiders" can bargain for wages that suit them, while unemployed "outsiders" cannot undercut them because hiring and training newcomers is costly.
- Wage rigidity and fairness. Surveys of managers, notably by Truman Bewley, found that firms avoid pay cuts because they damage morale. Pay set by contracts, a minimum wage or a trade union also adjusts slowly.
- Sticky prices. Sticky prices and wages mean that a fall in demand shows up first in lower output and jobs rather than lower pay.
Critiques and the modern debate
Critics question whether involuntary unemployment is a useful category. Robert Lucas argued that the distinction between voluntary and involuntary unemployment cannot be observed and is not needed to explain data; in real business cycle and some neoclassical models, changes in employment mainly reflect people's choices in response to wages and incentives. Monetarist economists accepted that unemployment could rise in the short run but expected it to return to its natural rate as expectations adjusted.
New Keynesian economists, by contrast, build wage and price rigidities into their models, so a fall in demand can leave people involuntarily unemployed for a time. Much evidence supports the view that many people who lose jobs in a recession did not choose to leave: in downturns, layoffs rise sharply while voluntary quits fall, as shown by the quit rate. Studies also find that people who lose jobs in mass layoffs suffer large, lasting earnings losses, which is hard to square with a purely voluntary story.
Involuntary unemployment and policy
If unemployment is mainly involuntary and caused by weak demand, policy can reduce it by boosting spending, which is why central banks consider labor market slack when setting rates and why governments use automatic stabilizers such as unemployment insurance. If unemployment is mostly voluntary or structural, demand stimulus would mostly raise inflation. Estimates of full employment and of the NAIRU are, in practice, attempts to measure how much of today's unemployment is involuntary and cyclical.