Voluntary Unemployment

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Voluntary Unemployment


In principle, a voluntarily unemployed person is a jobless worker refusing an available vacancy for which the wage is lower than a certain threshold known in the literature as reservation wage. John Maynard Keynes, in his The General Theory of Employment, Interest, and Money (1936), when describing the classical view of unemployment, introduces the notion of voluntary unemployment as a refusal or inability of a unit of labor [] to accept a reward corresponding to the value of the product attributable to its marginal productivity. According to this definition, frictional unemployment due to job searching would be voluntary, while unemployment determined by demand factors would be involuntary.

Robert E. Lucas Jr. criticizes this view, since there is an involuntary element in all unemployment, in the sense that no one chooses bad luck over good; there is also a voluntary element in all unemployment, in the sense that however miserable ones current work options, one can always choose to accept them ([1978] 1981). Unemployment should then always be viewed as voluntary, as alternative activities are always available in the economy. This interpretation is consistent with Ludwig von Mises that states, Unemployment in the unhampered market is always voluntary. In the eyes of the unemployed man, unemployment is the minor of two evils between which he has to choose (1949).

However, the question of voluntary versus involuntary unemployment should not be overemphasized. Indeed, for the majority of workers there is often a chance of being employed at a certain wage level. Nevertheless, even if a worker would refuse such a job offer, this does not seem to be enough to classify him as merely voluntarily unemployed.

Richard Layard, Stephen Nickell, and Richard Jackman (2005) make the example of the unskilled workers, for whom the number of well-paid jobs with good working conditions is far below the number of potential applicants. Therefore, the majority of the unskilled turn to jobs that pay less and are in general of worse quality. These jobs are easier to find and in some cases offer the possibility of immediate employment.

The labor market can then be divided into two sectors. One is identified as primary, where the best jobs are available, and the other is called secondary, where jobs are on average lower pay and of lower quality. In the secondary sector the labor market is said to clear, as vacancies are filled very quickly, the skills needed for the jobs are modest, and the wages are too low to appeal to a large number of applicants. In the primary sector the labor market does not clear, and job rationing results. Some of the workers excluded from the primary sector are subsequently employed in the secondary sector while others remain unemployed, according to the reservation wage of each individual.

Assuming that total labor force is equal to L and that all workers are willing to be employed in the primary sector, we can assume a negatively sloped labor-demand curve in the primary sector DD 1. The latter identifies the primary sector employment N 1 corresponding to the real wage W/ P 1 resulting from union bargaining or firms efficiency-wage policies. The number of workers available for secondary-sector jobs is then L N 1. The positively sloped labor-supply curve in the secondary sector, SS 2, is determined by the reservation wages of these workers and is affected by the characteristics of the unemployment benefit system. The negatively sloped labor-demand curve in the secondary sector, DD 2, illustrates the demand of secondary-sector labor for any given level of real wage in that sector W/ P 2. The market-clearing equilibrium is then reached when SS 2 = DD 2 and the employment level in the secondary sector N 2 is determined. The resulting unemployment level is then U = L N 1 N 2.

The nature of unemployment U is questionable. From one point of view, the workers in U are voluntarily unemployed because they are not willing to work in the secondary sector for a real wage that is below a certain threshold given by their reservation wage. However, they are also involuntarily unemployed because they are willing to work in the primary sector at the prevailing real wage but are not able to do so.

In a dynamic setting, the relative importance of the primary and the secondary sector varies according to aggregate as well as idiosyncratic shocks. Workers move within the three states (primary sector, secondary, and unemployed). Some of them will search for primary-sector jobs while unemployed, while others will become employed in the secondary sector.

It is the primary-sector real wage, which is the result of union bargaining or wage-efficiency policies, that will determine primary-sector employment, the crucial element in this representation. The entity and duration of unemployment will result from the general equilibrium of the economy.

SEE ALSO Dual Economy; Involuntary Unemployment; Natural Rate of Unemployment; Underemployment; Unemployment


Keynes, John Maynard. 1936. The General Theory of Employment, Interest, and Money. New York: Harcourt Brace.

Layard, Richard, Stephen Nickell, and Richard Jackman. 2005. Unemployment: Macroeconomic Performance and the Labour Market. 2nd ed. Oxford: Oxford University Press.

Lucas, Robert E. Jr. [1978] 1981. Unemployment Policy. In Studies in Business Cycle Theory, ed. Robert E. Lucas Jr., 240247. Cambridge, MA: MIT Press.

Mises, Ludwig von. 1949. Human Action: A Treatise on Economics. New Haven: Yale University Press.

Luca Nunziata