Unemployment benefits, the 'added worker effect' and income distribution in a monetary economy

By Guglielmo Forges Davanzati

PKES Working Paper 1402

February 2014

This paper focuses on the effects of public expenditure for unemployment benefits on the path of income distribution, within the theoretical framework of the monetary theory of production. By contrast to the standard view that unemployment benefits produce bad macroeconomic performances, it will be argued that – by increasing total demand – they boost the level of employment. The increase in the level of employment contributes to generate an ‘added worker effect’, which, in turn, pushes the Government to pay further unemployment benefits. At the same time, once firms’ fixed capital has been completely exploited, firms’ money profits at the aggregate level grow. This, in turn, generates inflationary pressures which reduces real wages. Moreover, following the Smithian argument that increase in demand fosters division of labour within firms, this policy can increase labour productivity, thus eventually counterbalancing the inflationary pressures associated to profits increases. A different policy option has been suggested, where – for the sake of allowing more ‘security’ to workers - the state directly supplies them with goods and services.

Keywords: Monetary theory of production, wage bargaining, unemployment benefits

JEL classification: E12 H53 J50 J65