Tom writes: >>... Stay tuned for "The End of NAIRU," coming soon to a listserv near you. Two years from now you won't be able to find an economist anywhere who will admit to having believed in the 'natural rate of unemployment'...<< Blair asks>>But why should this be so? I remember Yellen, Reich, and several others, last spring (as quoted in a WSJ article I could dig up but don't really want to), making the point that NAIRU is not given and unchanging but depends on the social context. So that in any given conjuncture there is some level of unemployment below which inflation will accelerate, but what that level is varies from conjuncture to conjuncture. One might think this vitiates the concept of NAIRU, but it allows an effective out from just the sort of squeeze Tom suggests is coming. Do I misunderstand something?<< I think we need to theoretically separate the NAIRU from the Natural Rate of Unemployment (NRU). The NRU is just one theory of the NAIRU but there are others. The NRU starts with a model of perfect labor markets (with wages determined by auctions, with workers being allocated to jobs efficiently, so that the U rate = 0) and then introduces "natural" imperfections such as frictions, information problems, barriers to labor-market adjustments, mismatches between the skills and location of job-seekers and the available jobs, minimum wages, unions, demographic factors, etc. This "explains" why U > 0 at "full employment" (a term considered normative and obsolete), or why labor markets are inefficient at allocating workers between jobs. More "scientifically," there exists a threshold, the NRU, so that if U < NRU, we either have accelerating inflation or (with incomes policies) steadily growing shortages; it is assumed that this threshold is "natural" in origin. The NRU also assumes symmetry, so that if U > NRU, we see decelerating inflation (and eventually accelerating deflation). The theory does _not_ say that the NRU is constant: demographic factors can change (e.g., the larger propensity for youth to be unemployed combines with a greater labor force participation rate of youth). And the government has an impact: it could abolish the minimum wage which in (orthodox-neoclassical) theory would lower the "natural" unemployment rate. This kind of thing is behind the common neoclassical and neo-liberal call for increased "flexibility" of labor markets. The NAIRU (non-accelerating inflation rate of unemployment) theory is a more general theory that simply says that at any one time, there exists a threshold unemployment rate below which inflation tends to accelerate. This may or may not be due to the "natural" forces that the NRU theory posits. For example, I'm sure that people like Yellen, Reich, et al. would say that the NAIRU is determined by a combination of "natural" and _institutional_ factors. (The latter are factors that though originally human-made have taken on lives of their own, independent of technology and tastes, indeed affecting the development of technology and tastes, contrary to hard-core neoclassical theory.) Some of the institutions might be such as the minimum wage, but there's a more (New Deal-type) liberal alternative: the excess of the NAIRU over what's explained by "natural" factors would be the normal market failure of labor markets, e.g., the existence of macroeconomic externalities. (Instead of being an external imposition on the assumed workings of a perfect market, this is a problem inherent in the normal workings of labor markets.) For example, paying efficiency wages can be part of a profit- maximizing strategy for an individual capitalist but ends up causing higher unemployment by interfering with the normal labor- market supply-and-demand process. Similarly, people like Doeringer and Piore have argued that the existence of segmented labor markets (which can be seen as institutional rather than "natural") raises the amount of U at "full employment." Some sort of government-sponsored restructuring or tax program might fix the problem, make the labor market work as desired. Of course, the more liberal sorts emphasize the need for improved training of labor, something that really doesn't go beyond the NRU theory. I can imagine that Marx could accept an institutional conception of the NAIRU: if there isn't "enough" of a reserve army of the unemployed (from a capitalist perspective), either profits are squeezed (as in the vol. I scenario, which assumes zero inflation) or there is accelerating inflation -- as workers are able to push up wages and cut back on work effort. (I'm assuming that Marx's posited fall in the rate of accumulation of capital in response to profit squeezes (or accelerating inflation) is temporarily counteracted by government spending or monetary policy.) A key difference of this Marxian theory from the NRU is the emphasis on work discipline; more important is that Marx saw capitalism as an artificial institution that can be replaced, abolished, along with the resultant need for a reserve army of unemployed workers. In Marx's vision, this kind of institutional NAIRU theory is a severe critique of capitalism as a system; "enough" unemployment is decided by the capitalists, who have the whip hand to impose their decision and protect their power. The NRU theorists, on the other hand, would see the reserve army (which they'd explain more in terms of simple supply and demand, not work discipline) as something that could never be abolished: TINA (there is no alternative, to quote Mrs. T). I would guess that people like Yellen and Reich would agree with the NRU folks that capitalism is the only alternative; they simply advocate different kinds of reforms. BTW, I don't see why a Marxian theory necessarily conflicts totally with the other theories. One might see the NAIRU as a result of the "natural" factors emphasised by the NRU theory (e.g., frictions), conjunctural-institutional factors emphasized by more liberal theorists, _and_ the more permanent institution of capitalism. To see the NAIRU solely in terms of the reserve army assumes that the capitalists have complete control over the labor-power makets so that they only get the U they want. But they don't have total control. There are some pockets of workers who the capitalists would _like_ to exploit but can't because the workers have the wrong skills, are in the wrong location, etc. (structural U). Such pockets are continually being re-created by the changes in the mix of industries that is part and parcel of the normal capitalist accumulation process. Of course, we don't know what the NAIRU is and it may have changed recently. If we drop the unreasonable assumption of symmetry and note that inflation decelerates more slowly that it accelerates, standard econometric techniques that assume symmetry lead to over-estimates of the NAIRU (as James Tobin points out). Dropping symmetry also makes the story more complicated: it's either to get inflation than to get rid of it, kind of like syphilis. Also, the NAIRU's value may be endogenous: as Shawn Hargreaves- Heap argued in the ECONOMIC JOURNAL in 1980, persistently high cyclical U can cause structural U to rise (as job-seekers lose skills, etc.), boosting the NAIRU. In any one year, the NAIRU might be seen as constant, but it changes from year to year, partly due to what kind of experience workers have had with cyclical unemployment. Anti-inflation policies using recessions, based on the assumption that inflation will leave as quickly and as easily as it came, can result in a rise in the NAIRU. BTW, Blair, could you find that article? in pen-l solidarity, Jim Devine [EMAIL PROTECTED] [EMAIL PROTECTED] Econ. Dept., Loyola Marymount Univ. 7900 Loyola Blvd., Los Angeles, CA 90045-8410 USA 310/338-2948 (daytime, during workweek); FAX: 310/338-1950 "Segui il tuo corso, e lascia dir le genti." (Go your own way and let people talk.) -- K. Marx, paraphrasing Dante A.
