Learn about the relationship between Employment and Unemployment.

Two major contemporary problems of macro­economics are inflation and unemployment. It was the concern with unemployment that gave birth to Keynesian economists in the early 1930s.

Keynes was the first economist to introduce the concept of involuntary unemployment. While classi­cal unemployment is real-wage unemployment, Key­nesian unemployment is demand-deficient unem­ployment. According to Keynes, the root cause of un­employment in capitalist economies is low demand or purchasing power.

If demand falls production will fall and if production falls the demand for factors of production (including manpower) will fall. Thus if production falls some workers will become unem­ployed and some capacity will remain idle.


Since 1945 the pursuit of full employment as the prime objective of policy was specifically adopted by western governments and they adopted Keynesian demand-management policies to achieve it.

These policies achieved considerable success and unem­ployment remained at very low levels throughout the 1950s and 1960s in almost all capitalist countries of the world. Consequently, there was shift of empha­sis as far as objectives of macro-economic policies are concerned.

The control of inflation came to be re­garded as more important. Most people began to think that mass-unemployment was no longer a ma­jor problem. Instead it was a thing of the past.

How­ever, by the early 1980s the major industrialised coun­try of the world (especially the U.S.A. and the U.K.) faced unemployment problem of a more severe na­ture than in the 1930s and once again the attaining of full employment became the most important macro- economic goal.


Normally we use the term ’employment’ to refer to those who are in some form of paid work and the term ‘unemployment’ is used to refer to those who are actively seeking jobs but are unable to get them.

In short, the figure for unemployment includes only those who have got their incomes registered at em­ployment exchanges. The percentage of people em­ployed in a country indicates what is called the labour force participation ratio.

Natural Rate of Unemployment:

In the middle of the 1960s Edmond Phelps and Milton Friedman developed a new concept called the natural rate of unemployment – the minimum rate of employment society has to tolerate in order to achieve price level statistics.