F. A. Hayek, “Good and Bad Unemployment Policies”

F. A. Hayek’s newspaper article, published in the Sunday Times on April 30, 1944, and supplied here in a 2022 republication, distinguishes policies that reduce unemployment immediately from those capable of sustaining employment over time. Written with postwar industrial adjustment in view, it argues that monetary expansion can suppress the visible symptoms of unemployment while aggravating their structural causes. Its three sections—“Maladjustments,” “Wages and Mobility,” and “Dangers Ahead”—move from the distribution of labour between industries to barriers against occupational movement, then to the political consequences of making employment dependent on continuing state intervention.

The opening paradox is that the ease of producing a rapid recovery may itself obstruct sound policy. Printing and spending money can return workers to familiar occupations without establishing whether those occupations remain economically sustainable. Hayek nevertheless explicitly accepts a stabilizing role for monetary policy:

Few people will deny that monetary policy can successfully counteract the deflationary spiral into which every minor decline of activity tends to degenerate.

The dispute concerns the objective and limits of intervention, not whether monetary action can ever be useful. Preventing a contraction from feeding upon itself differs from pushing expansion until it produces the greatest possible short-run employment. Hayek argues that the second objective can preserve an inappropriate allocation of labour, making the eventual adjustment harder. His governing distinction is between temporary relief and a lasting cure.

“Maladjustments” locates structural unemployment in a disproportion between the workforce assigned to particular industries and the output those industries can continuously sell. Hayek expects the end of the war to make this problem especially acute. His principal example is the recurrent overdevelopment of industries producing equipment for further production. Their intermittent bursts of activity can conceal the fact that they employ more workers than sustained demand can support. Credit expansion may reactivate these industries and attract additional labour, but that apparent success reproduces the conditions of subsequent instability.

A monetary policy aiming at a stable long-run position would indeed deliberately have to stop expansion before ‘full employment’ in those industries had been reached, in order to avoid a new maldirection of resources.

The qualification “in those industries” is essential: Hayek is questioning the restoration of full employment within an existing industrial distribution, rather than treating every unfilled job as desirable. Stable employment requires attention to where labour is employed and whether demand can sustain it. The section then broadens the argument beyond cyclical depressions to persistent unemployment, whose causes monetary policy is still less equipped to remedy.

“Wages and Mobility” explains why changes in demand need not produce lasting unemployment. Declining industries release workers, while expanding ones should absorb them. The obstacle arises when established producers and workers exclude newcomers and capture increased demand through higher profits and wages instead of increased output and employment.

If every gain of an industry is treated as the preserve of a closed group, to be taken out almost entirely in higher wages and profits, every shift of demand must add to the lasting unemployment.

This passage turns unemployment into a problem of access to expanding sectors. Hayek’s criticism encompasses both capital and labour: protected insiders can prevent growth from creating opportunities for outsiders. Faster economic change may increase temporary unemployment during job searches, but prolonged unemployment results when institutional barriers prevent the corresponding movement into new work.

Hayek consequently shifts attention from the general wage level to relative wages and the mobility they permit. He treats Britain’s unemployment following the restoration of sterling to its former gold value as an exceptional case in which monetary manipulation could remedy an artificially elevated national wage level. That experience, he argues, should not become the model for ordinary employment policy. In normal circumstances, the decisive issue is the relation between wages in different industries. Drawing conditionally on Keynes’s emphasis on workers’ attachment to nominal wages, Hayek suggests that expansion which maintains money wages in declining sectors may further discourage workers from leaving them. It does not dismantle the protective barriers surrounding expanding sectors.

The struggle against unemployment is in the last resort the same as the struggle against monopoly.

This is the article’s central conceptual compression. What appears to be an aggregate shortage of employment is recast as a problem of restricted entry, rigid wage relationships, and obstructed reallocation. The practical implication is that monetary stabilization must accompany measures against the monopolistic arrangements that prevent labour from moving.

“Dangers Ahead” extends the economic argument into a warning about responsibility and political dependence. If monetary authorities are expected to compensate for the employment effects of monopolistic wage policies, those setting wages are relieved of responsibility for their consequences. Meanwhile, postponed adjustment enlarges the portion of the economy sustained only by credit expansion and increasing government investment. Hayek’s final prediction is that this dependence would require progressively greater government control and ultimately lead toward a totalitarian state.

The article thus links employment policy to the preservation of an adaptable economic order. Its lasting analytical question is whether a policy creates sustainable opportunities or merely supports existing positions. The political conclusion is a warning built upon that distinction: immediate success can make reform harder by concealing structural weakness and increasing reliance on further intervention. Hayek insists that intelligent monetary policy is necessary, but that lasting employment also requires confronting the rigidities through which both employers and organized labour protect established interests.