It can be argued that a lack of aggregate demand can keep unemployment high for a long period of time without policymakers’ intervention, as the economy does not automatically return to full employment on its own.
Firstly, total demand in the economy, such as spending by government, firms, and households, may not be strong enough to create plenty of jobs. For example, consumers tend to cut down on spending when family income decreases, which lowers company revenue and prevents companies from hiring. John Maynard Keynes (1936) explains that an economy can remain below full employment for a long time because overall demand and wages do not adjust easily. They do not always fall quickly or accurately enough to ease unemployment. Instead, when people and businesses are uncertain about what’s ahead, they reduce spending and investment, which makes the problem even worse.
Secondly, issues such as poor information and coordination can prevent the economy from changing properly. Stiglitz (2010) argues that problems cannot be solved by the market alone due to these deficiencies. As a result, organizations are willing to recruit, and people are willing to work, while unemployment remains. Another example: when the world was hit by the global financial crisis, Indonesia was among the countries affected. This country experienced a slowdown in economic growth, especially in the export industry. The World Bank (2010) reports that Indonesia weathered the Global Financial Crisis comparatively well due to strong internal demand. Thus, it can be suggested that government support to improve employment should be included.
Lastly, while waiting for the changes, people continue to struggle for a period of time, remaining unemployed. Keynes (1936) claims that it is certain the economy will automatically restore itself to full employment. For an extended time, insufficient aggregate demand can keep output and employment below their potential levels.
Overall, Keynes’s justification is well-founded, as the economy does not reliably solve its problems. Demand may remain weak, and wages and prices often fail to adjust rapidly. As an outcome, government officials have a responsibility to assist the economy’s return to full employment.