Lambert here: “Natural” is indeed one of those words you should watch out for (like “we”). As in, for instance, “natural disaster.” And, of course, the Natural Rate of Unemployment (NAIRU). It’s often amusing to replace “natural” with “artificial”; generally there’s no loss of meaning, and often additional clarity is induced.
By Edmund Phelps, the 2006 Nobel Laureate in Economics and Director of the Center on Capitalism and Society at Columbia University. Cross-posted from the Institute for New Economic Thinking.
With unemployment reaching very low levels in major economies, despite low – and slowly rising – inflation, it’s time for central banks to rethink their reliance on the so-called natural rate. No numerical target for this rate can serve as an anchor for monetary policy.
Why is unemployment so low in countries where inflation remains subdued? For economists, this is a fundamental question. And when economists confront a fundamental question, fundamental disagreement often follows.
I was one of the rebel economists of the 1960s who rejected the macroeconomics we were taught in the 1950s – the “Keynesian” theory developed by J.R. Hicks, A.W. Phillips and James Tobin, according to which aggregate demand drove everything. High unemployment was caused only by deficient demand, and low unemployment only by abnormally high demand.
This bothered us, because the basic economic theory we were taught – the theory built by Alfred Marshall, Knut Wicksell, and Robert Solow – said everything was driven by structural forces. Faster technological progress and a greater preference to work or to save were to be welcomed, because they would boost the supply of labor and capital – and thus employment and investment. But the Keynesians maintained that structural forces were bad, because they cost people their jobs, unless policymakers manufactured enough demand to match the increase in supply.
A conclusion we drew was that, at the very least, the path of an economy, measured by conventional macroeconomic variables of unemployment, inflation, and output growth, is not fully determined by aggregate demand. Structural forces matter. Keynesians’ claim that “demand” is all-powerful – that it alone increases employment and thus investment and even growth – was groundless. Yet they continue to repeat it.
The structuralist perspective on macroeconomic behavior led to the concept that came to be called the “natural” rate of unemployment, borrowing from the notion, which arose in Europe during the interwar years, of a “natural” interest rate. Yet the term “natural” was misleading.
The basic idea of the structuralist approach is that while market forces are always fluctuating, the unemployment rate actually has a homing tendency. If it is, say, below its “natural” level, it will rise toward this level – and the rate of inflation will pick up. (Of course, a fresh shock to demand could send unemployment back up and reduce inflation; but the “natural rate” always exerts its centripetal force.)
But there is a complication I have long emphasized. The “natural rate” itself may be pushed up or pulled down by structural shifts. Moreover, shifts in human attitudes and norms may also have an impact.
Yet a curious development has posed a challenge to this view. America and the eurozone are in the midst of a boom. In America, unemployment has reached very low levels and shows no sign of rising back to its former natural rate – whatever its new level may be. With no more evidence than that, a structuralist model would predict an inflation rate that is already elevated and rising – and the inflation rate is not running high, even though the US Federal Reserve has flooded the economy with liquidity. In the eurozone, too, unemployment is falling, yet inflation rates are still low there, too.
What explains the paradox of low unemployment despite low inflation (or vice versa)? So far, economists – structuralists as well as diehard Keynesians – have been stumped. The answer must be that the “natural rate” is not a constant of nature, like the speed of light. Certainly, it could be moved by structural forces, whether technological or demographic.
It is possible, for example, that demographic trends are slowing wage growth and reducing the natural rate. From the 1970s to the late 2000s, demography was essentially a dormant issue. Now, the baby boomers are retiring from relatively high-wage jobs while young people, who start at relatively low wages, are still pouring in to the labor market. This slows the growth of wage rates at a given unemployment rate, leading to lower unemployment at a given rate of wage growth.
More interesting is the possible effect of people’s values and attitudes, and their hopes and fears about the unknown and unknowable, on the natural rate. Here we are entering terra incognita.
For me, a compelling hypothesis is that workers, shaken by the 2008 financial crisis and the deep recession that resulted, have grown afraid to demand promotions or to search for better-paying employers – despite the ease of finding work in the recently tight labor market. A corollary hypothesis is that employers, disturbed by the extremely slow growth of productivity, especially in the past ten years, have grown leery of granting pay raises – despite the return of demand to pre-crisis proportions.
I have also argued, based on a model of mine, that as the return of a strong dollar by early 2015 threatened to inundate American markets with imports, firms became scared to supply more output at the same price. Or else they supplied the same output as before at reduced prices. And they refused to raise employees’ wages. In short, more competition created “super-employment” – low unemployment and low inflation.
All this does not mean there is no natural unemployment rate, only that there is nothing natural about it. There never was.
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Of course Hicks, in later life (they always only do this *after* they’ve safely retired!) disowned his own IS-LM conceptualisation of Keynes’s theory as incorrect. Thus the (simplifying slightly) American conceptualisation of Keynes that I in the UK and countless others were taught in macro was, in fact, NOT something Keynes ever endorsed. Twas an early salvo in the freshwater-saltwater debates (and which continues, given that Krugman has been quoted as referring to IS-LM, knowingly/unknowingly propagating a conceptualisation of Keynesian economics that Keynes would have had nothing to do with).
I read this post a few times and still can’t figure out exactly what it was arguing. As a last resort — I tried to figure out what ‘structural’ meant and saw nothing arguing the case for the close:
“…as the return of a strong dollar by early 2015 threatened to inundate American markets with imports, firms became scared to supply more output at the same price. Or else they supplied the same output as before at reduced prices. And they refused to raise employees’ wages. In short, more competition created “super-employment” – low unemployment and low inflation.”
What does ‘structural’ mean if it accepts the government statistics without question and fails to look at the structure of the ’employment’ that exists. For that matter what is the ‘structure’ of the output which American firms supplied or supplied at reduced prices — do we still make stuff here? Out of curiosity I went ahead and downloaded the paper “The Structuralist Perspective on Real Exchange Rate, Share Price Level and Employment Path: What Room is Left for Money?” to see if there were some explanations there.
On page 3 the paper notes two earlier papers:
“The papers found a statistical relationship between the first difference of employment and the real share price index taken as a ratio to some indicator of the cost of investing in employees and customers.”
This was followed by the:
“…provocative hypothesis at the heart of this paper.” … “In the customer-market model, an appreciation (strengthening) of the real exchange rate in a country causes firms to moderate their price markups, thus pulling up the product wage and employment – an upward move along what is called the wage curve: the real appreciation may hence lower the natural rate of unemployment!”
Someone with a deeper knowledge of mathematics than I’ve attained — coupled with much more than passing knowledge of the theoretical arcana associated with ‘structural’ economics — will have to divine whether anything in this paper makes sense. The hypothesis at the heart of this paper and the conclusions in the other papers referenced are indeed “provocative” [– although other words come to my mind to describe them].
My husband is a man with many practical skills that relate to creating movie and theatre sets, and conference events. He approached his employer and said – hey guys – all the people working here on constructing stuff that you are making profits on are old and there are no young ones coming up with skills to replace us. There are no schools to train young people with the skills you need to make profits and we are starting to go off sick with bad knees and bad backs. Why don’t we set up a training programme? The answer was no way. People started to go off sick because of over work since there were no more skilled people to employ. And within six months of proposing a training programme, my husband left. At no point did the lack of skilled staff lead to an increase in wages. That company no longer exists. They were gone within a couple of years of my husband leaving. From personal experience this is a consistent pattern amongst SME’s who provide half of the jobs in the UK. If businesses would rather go bust that pay people more and train people how does that attitude impact wage levels? And employers are forever griping about the lack of skilled workers, but still no wage rises and no investment in training, how does that fit in with demand models, or structural models?
Nell,
Your observation & that of your husband is indeed correct, namely businesses, particularly here in the UK do not invest in training or producing future skilled workers – essentially, many businesses believe that role is for government, that is, government picks up the tab for training skilled persons who these businesses then exploit – work till you drop mentality really. Which is why the UK has a massive skills shortage and very low levels of productivity when compared to European peers, who funnily enough, do actually invest in training their employees.
Glad (if that is the right word) that I am not the only person observing this phenomenon. Perhaps it has something to the dying off of trade unions. Trade unions used to be heavily involved in training – they still are when it comes to training for union work (health and safety reps, etc). Employers in general have become accustomed to government largesse to the point now they feel no obligation to improve their own practices. As you say – this feeds into a low productivity environment. Although I expect your average Tory thinks low productivity equals lazy workers.
Yes, and it results in so much wasted labor when people train for jobs they don’t yet have. So many people take software courses to pick up skills and then those skills may or may not be the exact ones that will get them hired, of course companies are happy and demand an exact skillset for low pay.
And people still invest their money and time very uncertainly because they are desperate to get jobs.
Years ago most companies say had programmer training programs. They hired people with aptitude or chose people with aptitude from within based on tests, then trained. That’s how I got my start, and it was commonplace then. And of course, they then trained for the exact skills they needed.
A good friend went through one of those training programs. The employer? General Electric.
Training, or lack thereof, appears throughout our economy. One of the sayings in the IT world is:
Would you want to work for, let alone do business with, a company that did not provide for staff training or pay for up to date software?
Are employees in such instances to stay abreast of trends on their own nickel, such as using vacation time to attend conferences about best practices and emerging issues? One employer, now defunct, was hesitant to send employees to such conferences due to the risks of them being recruited away!
And they wondered why the staff motto was: The beatings will continue until morale improves. ;)
You have to consider what really drives business, at least along this dimension: how to produce the most with the least money in the most manageable manner.
What this perspective leads to is the Truth that employees, and certainly investing in them, is a fool’s errand. The salesman calls a CEO returns with alacrity are those promising to get rid of or minimize his employee dealings, through automation, offshoring, or leasing.
The OP spoke of an apparent willingness to let an organization die rather than invest in its people, practically in spite. It is more likely the owners were in that period planning or executing a pivot into a fresh business opportunity whether they could again slash and burn, before moving on to yet another fresh plot. Preferable with no employees whatsoever.
Who wants to deal with employees at all, with their sick days, pouting, let alone the interpersonal drama leading to sexual harassment suits, etc, etc, etc? Did I mention the sheer expense those people really entail if looked at rigorously in their totality? What a competently focused CEO wouldn’t give for being able to ditch the HR department altogether! For every 100 employees he can cut, there are 10 supervisors and an executive of some flavor that can be directly eliminated. Nothing would be better than if all those pesky people could be replaced by machines that can be handled by once-and-done amortization and depreciation budgeting, and a few maintenance agreements.
NOBODY with any sense seeks employees; quite the contrary.
Wowsers, looks like you know bupkis about the real world. You’ve never run a business or if you have you are a lousy manager who abuses his workers and accordingly gets little out of them but sullen performance of their bare-minimum duties.
My father managed manufacturing operations and was later head of manufacturing for a major company and I run a business. Front line workers, in operations and dealing with customers, have invaluable insight which is often ignored by bosses who only want to tell the higher-ups that everything is great. Why do you think major consulting firms have had robust revenues for decades? Regularly, they go in and talk to the employees and customers. They take information that is actually known in the company but is not getting to the top brass due to a combination of middle managers wanting to put happy faces on everything and senior management not wanting to hear bad news.
…maybe he’s a taxi driver?
Obviously an American one. English cabbies must have the Knowledge, a crushing memorization of all the streets in London and the fastest way between any of them.
Many of them are incredibly erudite, often in very arcane fields, and one even once won the MASTERMIND Championship (sort of an extremely classy version of WHO WANTS TO BE A MILLIONAIRE).
On the ride home from Gatwick yesterday, I had a lengthy discussion with a cabbie whose hobby was indeed reading books about macroeconomics. He was familiar with all the great names and theories, including Hayek’s.
Although he had heard of NC, he had never investigated it, but promised to do so after he got off work.
A thought on why you hate employees so much:
When you pay people just enough to keep them from quitting, they will work just hard enough to not get fired.
I pity anyone who has ever worked with you, for you, or been your business partner.
. . . Would you want to work for, let alone do business with, a company that did not provide for staff training or pay for up to date software? . . .
Total marketing guff.
Nell,
As a member of Unite I can attest to the fact that the union does have some good, practical training courses available for its membership on a wealth of work related issues. I’m also old enough to remember that the Trades Unions played a significant part in educating workers where I hail from in Pontypool, with quite a number making their way to Ruskin College, Oxford – all gone I’m afraid. With regards the demands of employers, not only do they wish for the state to train individuals to a standard where they can just be dropped in to many complex jobs, but they also do not desire to contribute to this whatsoever, be it via taxation, or more importantly contributing to onsite training that leads to real professional qualifications – hence the total lack of serious apprenticships in the UK, an apprenticeship being of a five to seven year duration, not the one year duration the Torys love – how stacking shelves equates to an apprenticeship I’ll never know!
Nice to meet you. I am a trade union member and representative in my workplace. UCU -not the strongest of unions, but academics still haven’t figured out yet that as far as their employers are concerned they are replaceable cogs in the machine, not valued professionals. We work often work together with our fellow TUs Unison and Unite. Strength in numbers.
As we are bringing up the role of government in training it’s workers: A very important role of the Iron Curtain was to keep those government trained workers on the East side of the wall working in Her factories, rather than allowing the West to exploit these Eastern trained workers with high paying (to them) jobs and exploitation by the capitalists.
I think that the City has some role in this; the problem is that once the finance guys are involved, the pressure is on to provide consistently good quarterly results, until such time as the company can be sold on. It’s a very short term view of the world and particularly prevalent in the UK.
So if you are only looking 3 months – or at best a year – into the future, then employee training is just an expense to be cut. Indeed, if you start seriously managing your company for the long term, using retained profits to fund training and investment, then you have a high likelihood of being bought out and asset stripped.. so for any non-privately-owned company it’s not even an option.
You see this in the US too. My department has 5 people, but three of us are 60+. Management thinks that is not a problem, because external help desk and automation will cover their back-sides. Complacency, let-someone-else-provide-prior-experience and magical thinking about IT is rife.
Was the company making enough to pay higher wages? Or was it having to cut rates to stay competitive? Or were rents rising to eat up any savings on wages? I think this is more complex than simple employer myopia or greed. We as consumers feel entitled to lower prices (thanks to Walmart, et al) and no one realized that lower prices here mean lower wages somewhere else.
The needle trades/textile workers went away when we could get cheap linens from overseas, still with US labelling, though. Our electronics are no longer user-serviceable, not because of “planned obsolescence” or anything like it: it’s because they are so cheap to make (a full-blown computer can fit on a board the size of a credit card) it’s not economical to repair them. Appliances and cars are laden with features that aren’t designed to last because then no one could afford them. Which means a lot of the jobs fixing them went away and were replaced by lower wage jobs swapping components.
Consumer demand is the driving force of an economy but we aren’t very careful about what we demand. The amount of violence over big screen TVs on the day after the US national holiday of thanksgiving — the acknowledgement of blessings — shows we have some way to go.
Business owners are largely reactive, with a few exceptions: if they don’t have to train new people (and if you are close to cashing out, maybe you don’t care if the business continues) they won’t. They don’t have to raise wages because people are reluctant to look for a new job in this economy and this is an era of specialists, not generalists. At first glance, “a man with many practical skills that relate to creating movie and theatre sets, and conference events” might be hard to place anywhere except a direct competitor who might well be under the same pressure.
Maybe things have changed but in the not so distant past (2001), a survey of medical doctors, who are among the most rigorously schooled members of the workforce, found that on the job training still accounted for 60% of their professional knowledge. One would safely assume that this percentage would be higher in other occupations.
IIRC, these data can be found in the book Dangerous Currents by economist Lester Thurow.
And that other 40% was delivered by the cute pharma rep in the pencil skirt who happened to drop off a bag of sandwiches and cookies for the staff right before she briefed the (older, male) physician on the latest off-label research.
..in one personal skill set, highest level engineers (unionized) were provided substantial pay raises to boost retirement benefits based upon pay, to stay extra 5 years…realizing brain drain was (3rd go round over last 10 years) frightening, regarding complex and overlapping systems.
However, no relevant training program has been formulated (yet) to advantage realistic perceptions regarding skill sets about be lost…
These upper level skilled, hands on + management types quite simply no longer exist; and it is questionable they realize said retirement benefits are no longer guaranteed, given current deficits in state retirement benefits nearly nationwide..
“For me, a compelling hypothesis is that workers, shaken by the 2008 financial crisis and the deep recession that resulted, have grown afraid to demand promotions or to search for better-paying employers – despite the ease of finding work in the recently tight labor market.”
More like, unions have been crushed and so each worker has been divided and conquered and can be got rid of easily with no threat of collective strike action to force the employer to agree to pay rises or better terms and conditions etc.
Even when you dress it up in alluded profits & prosperity, free money is a naked lie, and one we’ve never seen the likes of before in it’s current cyberinflation version, where it used to wreck a given economy in it’s usual guise formerly known as hyperinflation.
No wonder that economists can’t figure it out in regards to employment & inflation, they have no experience in the past to reflect upon.
I gave up with this article after the following paragraph:
Yet a curious development has posed a challenge to this view. America and the eurozone are in the midst of a boom. In America, unemployment has reached very low levels and shows no sign of rising back to its former natural rate – whatever its new level may be. With no more evidence than that, a structuralist model would predict an inflation rate that is already elevated and rising – and the inflation rate is not running high, even though the US Federal Reserve has flooded the economy with liquidity. In the eurozone, too, unemployment is falling, yet inflation rates are still low there, too.
I find it strange, that as in the USA & UK, many are speaking/discussing low levels of unemployment, whilst even a cursory glance at the Labour Participation Rate paints an entirely different picture. Indeed, in the UK 1000s are removed from the ranks of the unemployed daily by the wheeze of being ‘sanctioned’ by their local Job Centre, namely having all access to social benefits removed for months at a time – they are still without work & without any income whatsoever, hence the exponential growth in Foodbanks we’ve witnessed over the past seven years.
We seem to be on the same page. My immediate thought on reading that sentence was ‘labour participation rate anyone? My other thought was Bill Mitchell has done a way better analysis of NAIRU.
Agreed. Here is the link http://bilbo.economicoutlook.net/blog/?p=1502
Well, I think so too. Jobs are NOT that easy to get. But we don’t count people as unemployed if they only have even very part-time work any more and we don’t count people who have given up but would take a decent job in a heartbeat and could do the job.
And when there are so many so desperate for work, and you can get a very disciplined, educated worker for very cheap, the prospects of those who formerly would have taken the lower-grade jobs are even worse because they are driven out of the market by the intense competition.
I imagine he might also be perplexed over the rise in what he would refer to as Populism, as according to his economic navel gazing (except for a bit of a puzzle there among the fluff ) everything should be just fine for those bottom feeders, who dwell past the limits of his vision from yet another ivory tower.
Many of these people remind me of a good many of the contestants on an old TV show called “Mastermind”, who would fly through their specialised subjects, only to collapse in a heap during the second round general knowledge questions. My ” Uneducated ” Father would delight in often beating them on an overall score.
” Never have so many known so little about so much ” – 1895 HG Wells.
” Never have so many known so much about so little ” – 2017 ?
You do food banks, we do prisons.
We do try to keep up, by having the largest per capita prison population in Europe
Articles discussing low unemployment and economic growth as if they are presently observable are functionally indistinguishable from propaganda. The author may actually believe the over-cooked figures on which he bases his thesis, but that does not make them true. Low labor participation and a GDP goosed by counting FIRE sector returns as if they were a product, rather than a tax on productivity makes a mockery of this article.
Sigh. We are truly doomed if a “Nobel laureate” can’t even ponder the wage level variable in this calculation:
“What explains the paradox of low unemployment despite low inflation (or vice versa)? So far, economists – structuralists as well as diehard Keynesians – have been stumped.”
He alludes to it by mentioning that many younger workers are now entering the labor market, and they generally have lower wages than the retiring baby boomers. It doesn’t seem to cross his mind that many of these starting wages are lower, adjusted for inflation, than what the boomers got when they started. And much of that wage now goes to the FIRE sectors, which are not captured in inflation measures.
Alex A,
I think the issue you have detailed is far worse than that, particularly given 50% of our under 26 year olds have some kind of HE exposure, and as such have incurred a massive debt, in some instances, way over £70K, with starting salaries lower than in my generation.
By way of example, our next door neighbour left University after 4 years with a large debt, she qualified as a teacher & was forced, like many, to work part-time for a teaching agency. Her hourly rate was not only lower than a part-time FE lecturer got in the early 90s, but the agency then removed a large percentage as an administrative fee, thus leaving her with £10 per hour – this for a woman who had a First Class Honours Degree.
One of our legislators in Texas sneered (when confronted over low teacher pay) that that was stupid, teachers just needed to get a second job. And I have heard that in our public schools now, many of the younger teachers DO have a second job. This can’t affect the quality of teaching favorably. (And they take jobs they shouldn’t need to have if they were decently paid and in turn those a notch down can’t get those jobs because the teachers are doing them.) Yes, the low starting wages are MUCH lower than before with little hope for most people of decent earnings over a lifetime.
Many of the young have responded sensibly by becoming very frugal and prudent (there are many impressive people among them), and that is the best defensive move in a hostile environment, but a terrible situation.
..some of us – instructors U.S. and Europe, forced work summers to create living lifestyle found our ways into areas of interest during summer employ, creating businesses of our own, eventually transferring skills to area of interest – leaving Ed. altogether…
Many friends, international Ed. Europe, continue there, interests working abroad in various environment dictating their lifestyles…
And most have (European) wives earning as much or more to augment income, travel, pursuit of shared interests.
There is no such thing as Nobel Laureate in economics.
http://exiledonline.com/the-nobel-prize-in-economics-there-is-no-nobel-prize-in-economics/
Hence the quotes….
The “natural” rate of unemployment can only be zero as a limit, allowing only for administrative time gaps in transferring from one job to another. To posit a rate higher than this is to intentionally and callously build a “natural” level of human suffering and want into social policy. The beatings will continue until morale improves.
Oh, the word “natural” in natural rate of unemployment does have a purpose. It’s purpose is to imply that the economy is shaped by natural forces, rather than by people. It belongs in the same bin as the attempt to make economics a “real science” by mathematizing it.
If I were to try to describe the shape of the “field” of economics is I would describe it as a battlefield of academics over whose simplistic narrative of behaviors surrounding money and wealth is more wrong. Participants make claims like “Your narrative is too simplistic and wrong headed; my narrative is actually more correct.” Then they offer the equivalent of philosophical arguments for their creations. Philosophical arguments, btw, haven’t proven anything in 4000 years (they can’t).
The subject is considerably more complex than a physical system, governed by physical laws and principles, yet the economic theories still insist on simplicity and graphs you can draw on the back of an envelope. Economists are treating the topic as if it were supernatural. Then they whine that “it is too hard” to look at real systems, so they continue to invent overly simplistic ones (e.g. markets with perfect information).
The word ‘natural’ in the mouth of an economist or a philosopher has become a scary word. There is ‘natural’ as a force of nature lending scientific creds or animistic spiritual creds to an argument. There is ‘natural’ as in the ‘nature’ of humans — an abstract concept of unbending innate quality which if ill fit causes frictions. When any of these meanings — all I can think of for the moment — are attached to ‘unemployment’ by the current schools of economic theory I shudder. Past and present usages of ‘natural’ in economic arguments have been remarkably inauspicious and swarmy like the labels on this or that item for sale marketed as ‘natural’.
As I am much less understanding of economists than you I disagree with your notion that economists think real systems are “too hard” to deal with — however they may whine. Real systems don’t easily yield the answers those who employ economists want to find and besides the rationales generated are too complicated to sell.
There are plenty of economists who want to do good accurate research but are shut out of teaching, any position of influence or employment, if they don’t genuflect to the currently approved neoliberal “economic” dogma. The choice is honesty or poverty.
Sorry if I offend. I admit I lumped together all economists most unfairly.
No worries, none taken. I am just trying to see fairly, but that can really be hard to do so especially with what we are talking about.
After looking at the paper this post pointed to I had to reach a slightly different conclusion. The model in the paper is more complicated than a real system. The rationale becomes very simple in that case — “Trust me I know what I’m talking about … here’s the answer … and if you disagree go tear apart my Hamiltonian and 3 x 3 mathematical model.
The acronym “NAIRU” does not stand for “natural”. It means “non-accelerating inflation rate of unemployment”. The rate of unemployment below which attempts to reduce it further will cause inflation. I think the NAIRU is normally zero, but let’s take a little care with words, shall we?
True, but NAIRU is often referred to as the “natural rate of unemployment” as well. That is, they are two labels for the same concept (or for two concepts that have become one for all intents and purposes).
There was once a natural employment rate – it required us to work to create the things we needed. Necessity. We are now so technologically proficient that we can manufacture very good products and both control and maintain the supply of them – so that supply and demand are meaningless bec. there is no significant scarcity. No “natural” scarcity. And trade has become an employment contract between nations. Funny that the Fed is still operating in the last century with a mandate to balance the price-wage scale. Seems like doublespeak for protecting the dollar by imposing austerity – else why fabricate all those fictitious unemployment stats? I wonder, is there such a concept as the natural monopoly rate? It seeks its own level globally by balancing trade contracts?
Problem is that the official unemployment rate is wrong, actually still over 8% when you include still low participation rate among 25-55 cohort.
Using real rate explains lack of wage pressure.
NAIRU differs from country to country but is usually in the range 3% to 6%. Keynes regard for demand has been questioned in the article. As an employer my perception of stagnant demand, decreasing demand or increasing demand determines what action or inaction I take wrt to workforce expansion or contraction, inventory increases or reductions, workspace changes, wage changes. Never underestimate the power of perceived changes in demand, particularly future demand. Helicopter money’s main function is to raise perceptions of future demand.
Let us just briefly note that for at least 95% of human existence, the natural rate of unemployment was precisely zero.
I think what Dr. Phelps is trying to say is that it’s all psychological (or mostly so). As a psychologist, I could not disagree. I think his notion at the end rings true, although nobody seems to know what to do about it. It rings especially true when one considers the mountain of capital major corporations are sitting on as if it were a hatchable egg. Of course, the cash will hatch no profits on its own. However, again consistent with Phelps, it seems to provide a calming affect on the markets much like Linus’s blue blanket. To extend my metaphor into the future. Who might be the Lucy Van Pelt who will swipe that blanket just to shake things up? Anybody know a loose cannon with a Twitter account?