1. "Just enough" unemployment provides an external economy (in Marshall's sense of the term) for firms. It allows them to shed part of the overhead costs of their labor through layoffs when business is slack and it provides a ready pool of available hands to enable expansion when business picks up.
2. "Too much" unemployment, however is an external diseconomy for all firms as they incur extra costs through taxation to pay for policing and relief and they suffer reduced sales because of the decline in aggregate demand. 3. Because the effects of external economies are initially small but cumulative, just enough unemployment in the short period evolves into too much unemployment in the long period. 4. The long period discomfort of too much unemployment can be mitigated by stimulating aggregate demand through government deficit spending and monetary easing. 5. However, such aggregate demand stimulating policies can also be "too successful" in that they reduce not only the too much unemployment but also the just enough unemployment. 6. The ideal level of government intervention (from the perspective of capitalist firms) would boost aggregate demand just enough to offset the effects of too much unemployment without encroaching on just enough unemployment (NAIRU) 7. Repeat step #3. Because the external economies of government intervention are initially small but cumulative, the amount of unemployment that is just enough in the short period is not not enough in the long period. The level of just enough unemployment must be adjusted upward to a "new reality." -- Sandwichman
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