Underemployment Equilibrium
Underemployment equilibrium, also referred to as under-employment equilibrium or below full employment equilibrium, is a condition where employment in an economy persists below full employment and the economy has entered an equilibrium state that sustains a rate of unemployment above what is considered desirable. In this state the unemployment rate remains consistently above the natural rate of unemployment or non-accelerating inflation rate of unemployment (NAIRU) because aggregate supply and aggregate demand are in balance at a point below full potential output. An economy that settles into an underemployment equilibrium is how Keynesian theory explains the occurrence of a persistent depression in an economy.The term "underemployment" in this sense simply refers to the fact that total employment is under the level of full employment. Underemployment itself is a distinct term that refers to employed workers who are working fewer hours than they would like or in jobs that require lower skills (and often come with lower pay) than their education level and experience would indicate. Underemployment may be included as one component of the general unemployment rate, but is otherwise unrelated to the concept of an underemployment equilibrium, though these two uses are often mistakenly conflated by those unfamiliar with economics.
Labor Surplus Equilibrium
Definition
Labor surplus equilibrium, also known as underemployment equilibrium or wage insufficiency equilibrium, refers to a state where the employment rate in an economy remains persistently below full employment. In this state, the unemployment rate stays above the natural rate of unemployment or the Non-Accelerating Inflation Rate of Unemployment (NAIRU), as aggregate supply and demand balance at a point below the economy's full potential output.
Origin
The concept of labor surplus equilibrium originates from Keynesian economic theory. John Maynard Keynes first introduced this concept in his 1936 book, "The General Theory of Employment, Interest, and Money," explaining why market economies sometimes fall into prolonged periods of high unemployment rather than automatically returning to full employment.
Categories and Characteristics
Labor surplus equilibrium can be categorized into the following types:
- Structural Unemployment: Unemployment caused by changes in the economic structure, such as technological advancements or industry shifts.
- Cyclical Unemployment: Unemployment resulting from economic cycles, such as increased unemployment during recessions.
- Frictional Unemployment: Short-term unemployment caused by labor market information asymmetry or insufficient labor mobility.
These types of unemployment collectively contribute to the formation of labor surplus equilibrium.
Specific Cases
Case 1: After the 2008 global financial crisis, many countries experienced a significant rise in unemployment rates, with economies remaining in a state of low growth and high unemployment for an extended period. In this scenario, labor surplus equilibrium was evident as aggregate demand was insufficient to drive the economy back to full employment levels.
Case 2: Japan's "Lost Decade" in the 1990s, following the burst of its economic bubble, saw persistently high unemployment rates and sluggish economic growth. This is another typical example of labor surplus equilibrium.
Common Questions
Question 1: Why does labor surplus equilibrium persist?
Answer: Labor surplus equilibrium persists due to a combination of factors such as insufficient aggregate demand, structural issues, and policy failures.
Question 2: How can labor surplus equilibrium be resolved?
Answer: Resolving labor surplus equilibrium requires a combination of fiscal and monetary policies to boost aggregate demand, along with structural reforms to enhance economic flexibility and competitiveness.
