This paper shows that Pigou’s theory of unemployment, contrary to what Keynes thought, does not assume states of full employment only, but offers an analysis of situations of persistent underemployment which are not necessarily associated with labour market supply factors. Indeed, Pigou’s «classical theory» assigns a significant role to aggregate demand in the determination of mass unemployment, although Pigou was very cautious as regards the feasibility of demand policies as a means for achieving full employment. The modern theory of the natural rate of unemployment, as empirically developed in the context of the NAIRU approach, claims to provide an explanation of equilibrium unemployment based on labour market supply factors. After showing the weak operational content of the modern NAIRU approach, this paper emphasises the theoretical distance between models developed within this approach and Pigou’s «classical theory» of unemployment.
