Saturday, August 20, 2011

Natural Rate of Unemployment (NROU)

FRED shows this:

Graph #1

Looking at that graph, I was reminded of something Bill Mitchell wrote: that the NAIRU cannot be measured. (I'm not sure that FRED's NROU is identical to the NAIRU but it's gotta be close.)

Here it is, from Billy's of 12 January 2011:

As the neo-liberal resurgence gained traction in the 1970s and beyond and governments abandoned their commitment to full employment , the concept of the Non-Accelerating Inflation Rate of Unemployment (the NAIRU) entered the debate...

The NAIRU became a central plank in the front-line attack on the use of discretionary fiscal policy by governments. It was argued, erroneously, that full employment did not mean the state where there were enough jobs to satisfy the preferences of the available workforce. Instead full employment occurred when the unemployment rate was at the level where inflation was stable.

The estimated NAIRU (it is not observed) became the standard measure of full capacity utilisation. If the economy is running an unemployment equal to the estimated NAIRU then mainstream economists concluded that the economy is at full capacity...

I like Billy when he's doing history.

Anyway, here is another classic statement on the NAIRU from Billy Mitchell:

A Reuters market analyst (John Kemp) has created a stir by effectively declaring that the global economy is governed by some global NAIRU – a non-accelerating rate inflation rate of unemployment – such that the advanced economies cannot reduce their unemployment rates by expansionary fiscal policy and major structural reforms are needed. In a recent article – Mind the global output gap – he argues that “(e)scalating food and fuel prices are a sign the global economy is approaching full resource utilisation and the limits of sustainable output”.

Kemp is arguing, then, that even amid severe global recession, rising prices are a sign of "full" employment of resources!

Mitchell continues:

He claims that the “high unemployment and idle factories” in the advanced economies are not a sign of a “cyclical lack of demand’ but rather reflect “structural shifts”. From a policy perspective this is natural rate theory on a global scale and effectively denies that sovereign governments can influence domestic demand and real output (within their own policy boundaries) through aggregate demand management. This is the ultimate neo-liberal denial of the effectiveness of fiscal policy.

Billy disagrees, of course. He thinks the structural problem is nonsense.

I disagree with Kemp, too. But I think the structural problem is the excessive reliance on credit. I think the result of that problem is cost, the excessive cost of using money, a cost that has become significant because we use credit for money. And I think the cause of that problem is policy -- the policy that thinks we need credit for growth.

But I digress.

Graph #2

The blue trend-line on Graph #2 is the same shown on Graph #1, the "natural rate of unemployment." The red trend-line is actual unemployment. It varies a lot more.

The blue line looks a bit like a moving average of the red line.

I think it's funny that where the NROU is projected into the future, they show a perfectly flat line.

Graph #3
For Graph #3 I took Graph #2 and added the U6 rate, the broader measure of unemployment. In green there, after 1990 on the right.

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