What to do?
We have answered one of the questions posed earlier in this chapter: "Is unemployment a social problem?" The answer given was: yes, because of congestion of job markets, free market levels of unemployment probably are usually greater than would be efficient, and so, in that sense, it is a social problem. The other question was: Is unemployment a symptom of excess supply? We need to address that question now, and move on to another, which may be closely related: What, if anything, should be done about this social problem?
It all depends on how we define the supply of labor. Old classical economists (and most Keynesian economists) defined the supply of labor one way. Think of all the job offers a person might have -- higher or lower wages, shorter or longer hours, better or worse conditions. Some would be acceptable, in that the benefit from the wage would be at least as great as the "disutility of labor," that is, the subjective sacrifice to make the effort to do the job. Other offers would be unacceptable -- the benefit of the wage would be less than the disutility of the labor. The supply curve of labor was understood as the boundary between the two, so that, on the supply curve, the wage was just high enough to offset the "disutility of labor."
Now suppose a person comes to the labor market unaware of how much his labor is really worth, makes the effort to search for a job, and gets an offer that is acceptable -- a high enough wage to offset the "disutility of labor." But suppose he believes (perhaps correctly!) that he can get a better offer if he waits. Is he on his supply curve of labor? According to the New Classical interpretation, yes he is: his supply curve of labor reflects his expectations about the value of labor, which are "rational." But according to the Old Classical interpretation, he has an excess supply of labor. The offer was acceptable, it was to the left of the boundary between acceptable and unacceptable offers, which is (in Old Classical terms) his supply curve.
It seems we can have supply equal to demand (in New Classical terms) and not equal to demand (in Old Classical terms, which Keynesians have also had in mind) at the same time. New Classical and Keynesian/Old Classical concepts of supply and demand for labor do really prove to be like the two different definitions of a sea!
I prefer to interpret it this way: we may have equilibrium in the market for job search, but not in the market for labor. In some circumstances, we cannot have equilibrium in both of these markets at the same time. This is especially likely when there are few opportunities in the job search relative to the number of searchers. That's why we sometimes find ourselves with excess supplies of labor -- when we cannot have equilibrium in both markets, excess supplies of labor and equilibrium in the market for job search is one possibility.
New Classical economists will not agree to that interpretation, I am sure. And each can be correct, in terms of her or his own definition. But which definition works better? The practical question is: what should we do to reduce inefficiently high levels of unemployment? Which definition gives us the best guidance in answering that question?
What to do?
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