Non-Accelerating Inflation Rate of Unemployment

The NAIRU is defined as the rate of unemployment where inflation does not accelerate, or in other words, where additional demand will not increase employment it will only increase inflation. 

Historical Evidence

Drawing on Milton Friedman's articulation of the concept of a natural rate of unemployment, Volcker used the idea of a tradeoff between inflation and unemployment to battle high inflation in the 80's (Ball, 2009). In the mid-1990's economists believed the NAIRU to be around 6% (Baker & Bernstein, 2013) however, when Greenspan kept interest rate low, the unemployment rate drop to a low of about 4% in 2000.  In 2000 there was a slight increase in inflation but the cause for the increase may have been other shocks in the economy, not higher wages (Baker & Bernstein, 2013).
 
Econometric evidence suggests that the NAIRU exists but fluctuates (Ball, 2009). Two major shifts in the NAIRU occurred in the 1960's and 1990's, a time when workers held lots of bargaining power and a time when workers held little bargaining power respectively.

WS-PS Model (Blanchard, 2005)

Wage Setting

W/P = z - bu

where W/P is real wages
b is the sensitivity of real wages to the unemployment rate
u is the unemployment rate (measure of bargaining power)
z stands for all other variables affecting wage setting


Price Setting

P = (1+m)W

P is price
m is the mark up determined by degree of monopoly
W is nominal wage


Solving for u:

u* = (1/b)([(z-(1/(1+markup)])

which means the natural rate of unemployment (u*) depends on the degree of monopoly and bargaining power of the workers. 

The idea of the NAIRU/Wage-Price Spiral rests on the assumption that businesses will pass on the added cost of higher wages to the consumers via the mark-up.  Higher wages means higher prices which means real wages won't increase which means workers will expect higher inflation and bargain for even higher nominal wages (and they can because the labor market is tight) which leads to increased prices, and so on. 

Even if the degree of monopoly power were zero, the goods market was purely competitive, and the mark-up was zero, there could still be a wage-price spiral if the labor market was tight.  The price of the good would just be the cost of making it, which would mean any increase in nominal wages would result in an increase in the price, which would leave real wages unchanged:

Old Price + change in wages = Old Nom Wage + change in wages

In the purely competitive market, there wouldn't be any profit but the WP spiral could still occur.  If there were differing degrees of monopoly, different companies would reap different profits due to the magnitude of their mark up which depends on their market share.  However, it seems no matter what the value of the mark-up is, firms will strive to keep it constant, prices will always rise to maintain the mark-up meaning profits will remain constant. 

NAIRU and the Distribution of National Income

Pollin brings up an interesting thought, what if firms didn't pass on the higher wage costs to consumers, and just took lower profits (Pollin, 1998).  

profits  = revenue - costs

If a firm faces increased costs, it can raise revenue (prices) to keep profits constant, or it can take the loss in profits.  This would distribute more of the national income to labor (which at the moment sounds like something labor could use).

One way to distribute more of the national income to labor is to reduce the mark up.  This is a non-obvious reason why full employment is good for workers.  Abba Lerner offers a cycle of how full employment can result in reduced degrees of monopoly:

↑employment→ ↑business confidence→ operating at high level of capacity ↓markup (is possible) → ↑competition (actually decreases mark-up) → reduced degree of monopoly --> more national income going to labor.

Of course, then again businesses might not mind mild unemployment. Marx, Robinson, Stiglitz, and Krugman among countless others have observed unemployment (up to a point) is great for businesses because it functions as a worker discipline device.  Workers fear getting sacked so they don't ask for higher wages, better conditions, say no to more responsibilities, etc. 


NAIRU Today

The on-going discussion of income inequality is surely a good reason to explore the mechanisms of income distribution.

Apparently there is some talk of monetary tightening on the grounds that we are reaching the NAIRU.  I think we should consider history and the quote below, before making such bold claims.

"We understand that as the unemployment rate falls to lower levels, the risk of accelerating inflation increases. But if the rate of inflation is not accelerating, there is the risk that people are being needlessly denied the chance to work and wages for those at the bottom are being held down by bad government policy " (Baker & Bernstein, 2013).


 .................................................................................................................................................................


Baker, D. & Bernstein, J. (2013). Getting Back to Full Employment

Ball, L. (2009). Hysteresis in Unemployment: Old and New Evidence.

Blanchard, O. (2005). Macroeconomics.

Pollin, R. (1998).  The Reserve Army of Labor and the Natural Rate of Unemployment: Can Marx, Kalecki, Friedman, and Wall Street all be wrong?

Disincentives to Work or No Work?

Three major on-going political and economic debates are centered around income inequality, the minimum wage, and the welfare state. Highly interrelated, these debates contain the same theoretical underpinnings. 

• One narrative for income inequality (Mankiw-esque):

People who earn higher incomes deserve it for various reasons; ambition, hard work, ingenuity.  The return they get for being skilled, talented, or educated is fair. We need income inequality to make people work hard. 

• One narrative for abolishing or not raising the minimum wage:

People working minimum wage jobs can better themselves if they got an education.  It isn't a choice to work those jobs, no one is stuck there. 

• One narrative for a smaller welfare state:

People abuse the system and don't want to work.  If they had no other choice but to work, they'd find a job.  If people sincerely can't get a job, we retrain them and they'll be able to get one then.



The theory that lies beneath all the rhetoric is human capital.  Wages are no long subsistence wages, as early economists theorized, but they are a return to our skills, talents, and hard work.  This theory along with the assumption that jobs are always available is what makes these narratives believable. 


It is the assumption that jobs are always available I'd like to explore.  There are many measures of unemployment, but there are two in particular that could help shed light on this question: the Beveridge ratio* and the inverse of the Beveridge ratio.  The Beveridge ratio is the ratio of job openings to number of unemployed people.  The inverse is well, the inverse. 

A good Beveridge ratio (for the worker) would be 1 or higher since a number higher than one would mean there is more than one job opening for every unemployed person.

A good inverse Beveridge ratio would be less than 1, meaning for every 1 unemployed person, there's more than one job opening

Using FRED and JOLT series:

Civilian Labor Force (CLF16OV), Thousands of Persons, Monthly, Seasonally Adjusted
Civilian Employment (CE16OV), Thousands of Persons, Monthly, Seasonally Adjusted
Job Openings: Total Nonfarm (JTSJOL), Level in Thousands, Monthly, Seasonally Adjusted

I first calculated the unemployment level by subtracting the employed level from the labor force.  Then constructed the ratio and the inverse for the years 2000-12 to 2013-12.  Unfortunately the JOLTS job opening series doesn't go back further than 2000-12.

As you can see, the Beveridge ratio (for this times series) never even reaches one and the inverse then obviously can never drop below one. 

These measure are conservative because they do no include marginally attached or part-time workers who would like full-time jobs. 

The point here is that we assume jobs are just floating around unfilled because people are too lazy to work, too unmotivated, or too discouraged by the welfare they receive.  Why don't we check our assumptions?  Because if I have calculated everything right (which I may not have so I encourage you to check) it seems that there aren't enough jobs to go around.  Hence, the narratives to get a job or get skills or an education fall apart. 


*The Beveridge ratio is a term my past professor at Roosevelt used and I think I remember him saying, no one else really calls it by that name.

The Economist

How to be a true progressive

"He wants to invest more in the poor, but has shown no appetite to overhaul America's welfare state, many elements of which- from disability insurance that discourages work to ineffective training schemes do nothing to boost economic opportunity, and often undermine it"

Why is the disincentive to work always framed as the welfare state being too strong? The way I look at it, the disincentive to work is wages being too low. 


A memo to Obama

"taxing the rich more- is a blunt edged response to inequality"

Agreed.  The systemic issues should be addressed but in the meantime...

"Mobility and opportunity, on the other hand get their hearts pounding"

Yes because without the idea of upward mobility and opportunity their story wouldn't make sense.

"Any negative effects of the minimum wage can be counteracted through the EITC"

Let real wages stagnate longer, take away transfers since people will be working their $7.25/hr jobs (if they exist) and everything will work out because they are working and will get a tax credit. 

"offered intensive counseling and training to the long-term unemployed"

So they can be skilled cyclically unemployed people.

"Since people who end up on DI seldom leave, the key is to persuade them not to apply"

...

We should minimize transfers because if people are willing to do what it takes (accept lower wages, enroll in job training) they can get hired again.  The minimum wage is fine at $7.25 because you are able to move up if you do what it takes. 

Am I missing something?  It sounds like mobility and opportunity are assumptions for these proposals, not arguments to improve them. 


Inequality v growth (enough said?)

"Some inequality is needed to propel growth, economist reckon.  Without the carrot of large financial rewards, risky entrepreneurship and innovation would grind to a halt."

Without the carrot in your mouth, risky offshoring and tax dodging would grind to a halt.


Plucking the goose

"At a time when the rich world is struggling to generate economic growth, you might imagine that its politicians would be competing to attract good companies and stimulate them to create jobs, innovative products and revenue"

This sounds a lot like developing countries competing for capital inflows which often inflate bubbles, misallocate resources, and fly out at the first whiff of paranoia. 

"data protection officer to safeguard customers' details.  The cost would be monumental. "

This kind of statement might explain why businesses aren't looked upon so brightly today by some.  Cost of providing quality service is just too much?

6 millionaire myths debunked, debunked- Keys to Success or Mirage of Opportunity

6 millionaire myths debunked

1.

People might read the article above and think, "Well gee, what's the big fuss about income  inequality?". 

The article is particularly misleading in the context of the income inequality discussion because the article is discussing a stock variable- accumulated savings, assets. Whereas income is a flow- it has units of time attached to it.

Clearly it is easier to amass a million dollars than to earn a million every year.  Knowing that you'd think wealth inequality might be better than income inequality, but it is actually worse.

2.

"their first million in dozens of different ways, from starting their own businesses to investing in the stock market or real estate. And those aren’t the only paths to becoming a millionaire, either: Others hit the mark by simply living below their means and saving portions of each paycheck. "

This assumes people start life with collateral or savings.  What happens when you are living at the means floor? Cheapest apartment, ramen budget... How do you save?

3/4.

"In most cases, millionaires have gotten to where they are precisely because they've practiced excellent savings habits and live frugally. They learn to make smart choices...without letting excuses get in their way. They, too, have to deal with unexpected expenses — plumbing leaks, health insurance increases, car trouble. They just keep moving forward despite the inevitable obstacles they have to overcome"

While in school,  Jim takes out loans to cover his tuition, he works a part-time job to pay for rent, food, and transportation. Of course his pay is minimum wage, which he hates (that's why he's in school) so he has to be frugal and eat ramen everyday (which has the effect of makes him unhealthy).  Say his car (which apparently fell from the sky) breaks down and now he needs to take the bus everywhere and save up for a new used car.  He feels like the bus and all his hard work is going nowhere.  Nonetheless he's absolutely sure when he graduates there will be a job available for him that pays enough to pay for the box he lives in (apt), beater (cheapest car he could find-hopefully it won't breakdown again), student loans ($500/month) and still save something.  He made all the correct smart choices so naturally he'll be validated.

5.

"Not so: Pure luck is not a factor in achieving success. Rather, truly successful people make their own luck. After all, a million-dollar idea is worth nothing without execution...Casey would say it was hard work, not luck, that got him over the million-dollar threshold. After getting an “in” at that first store, he worked 12-hour shifts — sometimes several in a row, at various stores, without stopping to sleep in between —"

Robinson Crusoe- making rational choices with limited resources.  No human relationships to constrain him! No society to speak of. 

6.

"Another common myth is that millionaires were born into money or inherited it. But that's not often the case. In a recent survey, Fidelity Investments found 86 percent of millionaires are self-made"

Again, it is much easier (I'm not saying it is easy by any mean, just easier) to amass one million than to receive one million per year.  And just out of curiosity, what exactly does "self-made" mean? Apparently it means using the participant's perception of what "wealthy" means as the "objective", scientific variable. 


Tardy, J. (2014) 6 millionaire myths debunked. Yahoo Finance.