On Sat, Mar 06, 2004 at 04:52:18PM -0500, John D. Giorgis wrote: > In any Economics 101 textbook, you will find a concept called the > "Non-Accelerating Inflation Unemployment Rate", or NAIRU. This > is considered by economists to be the lowest sustainable rate of > unemployment without increasing the rate of inflation.
Not all Ph.D. economists agree: http://www.hussman.net/html/economy.htm#wageprice The belief in a tradeoff between inflation and unemployment is both widely held and completely false. On a statistical basis, the relationship between inflation and unemployment is actually slightly positive; higher inflation is weakly correlated with higher unemployment. The relationship is highly significant if we lag unemployment by two years. High inflation today is strongly related to high unemployment two years later. In contrast, there is no statistically significant evidence that low unemployment today is followed by high subsequent inflation. There is also no evidence that excessive, inflationary credit creation can be used to create jobs. The widespread view to the contrary is based on a 1958 Economica paper by A.W. Phillips, which presented what has come to be known as the "Phillips Curve". Phillips studied the relationship between unemployment and wage inflation in Britain using a century of data through the 1950's. What he found has a very straightforward interpretation: when labor is scarce, the price of labor tends to rise. This is a basic fact of economics, and was indeed supported by the data presented by Phillips. Moreover, the data Phillips used was largely during a period when Britain was under the gold standard, and overall price inflation was subdued. I've long asserted that the only accurate interpretation of the Phillips Curve (which still holds true in the data) is that low unemployment is associated with inflation in real wages. Quite simply, when workers become scarce, the price of labor tends to rise faster than the overall price level. Unfortunately, over the past several decades, the idea of the Phillips Curve has been twisted beyond recognition. Some economists and the public have quite incorrectly come to believe that the Phillips Curve is a relationship between unemployment and overall prices. Moreover, it is often argued that higher inflation can be pursued as a way to create jobs. This is a fascinating distortion of the facts. The true Phillips Curve says that low unemployment tends to lead to inflation in real wages. The notion that higher overall inflation can buy jobs not only drops the words "real wages", but reverses the direction of cause and effect. In short, when workers become scarce, the price of labor tends to rise, relative to the price of other things. There is nothing controversial in this. However, the belief that overall inflation can buy jobs is simply false. The belief that low unemployment causes general prices to rise is also false. Even if wages rise, there need not be general price inflation. As long as labor productivity (output per worker) is growing, workers can be paid higher wages without having to raise output prices. In addition, wage increases can be accommodated by reducing profit margins, rather than by raising prices, particularly when profit margins are high.The only way for wages (measured in dollars) and overall prices (also measured in dollars) to "spiral" higher together is for the government to create too many dollars. -- Erik Reuter http://www.erikreuter.net/ _______________________________________________ http://www.mccmedia.com/mailman/listinfo/brin-l
