Disguised Unemployment and Underemployment

In her well-known essay ‘Disguised Unemployment’ Joan Robinson coined this term for a situation widely observed in the Great Depression in which men, thrown out of regular employment, crowded into occupations like carrying bags, rendering small services or selling matches in the Strand. The reasoning underlying her argument can be brought out by a simple two-sector model: in one sector money wages are rigid downwards; in the other, where self-employment is common, incomes are flexible. In competitive full employment equilibrium, the marginal productivity of labor is the same in both sectors. If then a fall in aggregate demand below the full employment level occurs, men will be thrown out of work in the rigid wage sector, but, rather than become unemployed, will move into the flexible income sector. Money income per man in this sector will fall as more men are accommodated to spread a smaller work load. Productivity differentials (measured in terms of man-years, man-weeks, or man-days, but not in terms of man-hours, for productivity of hours not worked is not meaningful, though it is not clear how hours spent waiting for work, or in search of work, should be counted) will increase, but no visible unemployment will appear. The difference between a situation of general low labor productivity (say due to absence of skills) and a situation of disguised unemployment in this sense is that a rise in the level of effective demand will shift workers back into the high-productivity, rigid-wage sector and remove the disguised unemployment. The workers are adapted to the requirements in this sector and, if the time spent in the flexible sector has not been too long, so that they have not forgotten their skills, have remained well fed and healthy and have not been demoralized, a rise in effective demand is a sufficient remedy.