Involuntary vs. Voluntary Unemployment

Economist and Blogger Roger Farmer posted last month about “involuntary unemployment” and its applications to labor search models. He defines involuntary unemployment as a situation where “the ratio of the marginal disutility of work to the marginal utility of consumption is not equal to the real wage.” The idea of involuntary unemployment was first introduced by Keynes, and Farmer believes that it is a “pretty accurate description of the equilibrium outcome of labor search models.” (http://rogerfarmerblog.blogspot.com/2015/03/yes-david-unemployment-is-sometimes.html)

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(http://classconnection.s3.amazonaws.com/34/flashcards/918034/png/ld_ls_for_voluntary_and_involuntary_ument1337080951936.png)

In more readily understandable terms, involuntary unemployment occurs when a person is “willing to work at the prevailing wage yet is unemployed,” whereas voluntary unemployment is where workers “choose not to work because their reservation wage is higher than the prevailing wage.” (http://en.wikipedia.org/wiki/Involuntary_unemployment)

More specifically, Farmer talks about how involuntary unemployment is a useful way of distinguishing unemployment that is socially optimum (versus unemployment that is not socially optimal). I believe that this is an interesting approach to viewing unemployment — especially during times of higher unemployment figures. Some economists believe that unemployment is never voluntary. However, if all economists were to agree upon the distinction between involuntary and voluntary measures, there may be more practical applications to this accepted definition.

In this view, voluntary unemployment — although not necessarily easier to eliminate — would be strictly based upon an incentive system, and a better understanding of individual utilities would be necessary. As we have discussed in class, there are many different types of unemployment measures. In my opinion, involuntary unemployment would be most directly categorized as “structural unemployment,” while voluntary unemployment could apply to many other situations. If voluntary unemployment could be addressed differently than involuntary unemployment via a new incentive structure, perhaps there would be less unemployment hikes during recessions than historical data has shown, and unemployment could reach a new socially optimal level.

Erica Fleming

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2 thoughts on “Involuntary vs. Voluntary Unemployment

  1. kacoff17

    Voluntary unemployment seems to me like it is frictional unemployment as well. They are waiting/looking for a job that suits their needs even though they could perhaps have another job at a lower wage. The way Erica described voluntary unemployment, makes me thing that this kind of unemployment is very low during times of recession because the finding rate is low as well and if you are unemployed and the economy is not doing well, you are not going to wait for a job with a higher wage. Involuntary unemployment in turn, would rise during times of recession because people are willing to take almost any job.

    Reply
  2. Victor Matheson

    Nice post. It really is interesting to think about how many ways we might think about how a why a person might not have a job. Unemployment is a trickier concept than one might first think.

    Reply

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