Keynesians, Monetarists, and Unemployment
The old debate between Keynesians and Monetarists is often considered to have been about the monetary transmission mechanism or the Phillips curve. However, an important element of the debate was in regards to unemployment and its effect on real output.
The typical Keynesian story about unemployment is that an increase in unemployment reduces income, which reduces consumption, and reduces aggregate output. Individuals base decisions on current income receipts. Unemployment benefits thus serve to compensate the job loser from the fall in income.
The monetarist view of unemployment, however, is framed within the context of Milton Friedman’s (1957) permanent income hypothesis. According to the PIH, permanent income is known, but there is uncertainty surrounding current receipts. A job loser whose behavior is characterized by the PIH will increase measured unemployment, but whether or not the job loss impacts real output depends on whether the change of circumstance results in a permanent downward revision of anticipated income. An increase in unemployment that is expected to only cause a change in receipts will not cause a reduction in consumption or real output... http://everydayecon.wordpress.com/2010/06/02/keynesians-monetarists-and-unemployment/
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