Theories of the general level of employment are largely a product of the period after the Firs World War. Before then, economists considered that the forces of free competition always tended to bring about full employment. Such unemployment as occured was said to be due to impediments to the free working of market forces. Thus there might be structural unemployment, caused by the decline of an industry employing labour which could not easily transfer to other jobs, but this would be temporary. Recruitment to the industry would be halted, and the labour force would be reduced by natural wastage until it was only just large enough for the reduced needs of the industry. Unemployment could also exist if workers asked too high a wage, and the remedy was seen as a reduction in wages which would make it worth while for employers to use the whole of the labour force.
It was conceded that temporary unemployment might be caused by the operation of the trade cycle. From the end of the eighteenth century to the outbreak of the First World War there was a fairly regular cycle of boom and slump, periods of high prices and full employment alternating with periods of low prices and employment. The trade cycle was regarded as a fairly serious problem but the periodic unemployment it caused was nevertheless still considered to be exceptional and temporary. Depression was succeeded by boom and full employment re-established.
After the end of the First World War it was realised that the problem of the level of employment was a more fundamental one than economists had hitherto realised. The swing of the trade cycle appeared to give place in the 1920’s to chronic unemployment of a magnitude which was quite inconsistent with the theory that unemployment was due merely to impediments in the working of a system which had an automatic tendency to produce full employment. It was realised that depression could be a stable condition, and need not necessarily be followed by recovery. During and after the Second World War the problem was different. There was a constantly high level of employment and constant inflationary pressure. Chronic depression appeared to have given place to chronic over-employment.
Attempts have been made to explain the level of employment by means of a purely monetary analysis. There is undoubtedly a correspondence between the behaviour of prices and the level of employment; rising prices are associated with high employment and falling prices with a low level of employment. There is now little doubt that both the general price level and the level of employment are themselves caused by other factors.
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