PDA

View Full Version : Natural rate of unemployment



johnw
12-23-2014, 04:33 PM
I was reading a Fed document about the natural rate of unemployment (yes, I know, I'm a nerd) and I ran across this:


http://testing.kansascityfed.org/PUBLICAT/ECONREV/econrevarchive/1986/1q86wein.pdf
The natural rate of unemployment is defined as the rate of unemployment at which there is no tendency for inflation to accelerate or decelerate.

It seems to me that there's a conceptual problem here. If that's how it is applied in policy terms, we'd see no increase in real wages even if there was an increase in productivity. In fact, if that's the way it is shaping policy, you would expect some time around 1980, when Milton Friedman's ideas began to be applied, a disconnect between productivity growth and wage growth. Something like this:

http://upload.wikimedia.org/wikipedia/commons/thumb/7/73/US_productivity_and_real_wages.jpg/1024px-US_productivity_and_real_wages.jpg

Can it really be that Friedman didn't realize this would happen, or has the application of the theory just been used to transfer wealth from people who work for wages to people who own things? It seems pretty obvious that if your notion of the wage inflation that's appropriate to the natural rate of unemployment doesn't allow for real growth in wages, and you make that an important part of how you determine policy, you'll end up transferring the growth to those who don't work for wages. The mechanism would be to keep enough slack in the demand for workers to suppress worker's ability to negotiate higher wages.

From the same document:


In the past, policymakers might have responded by aggressifly pursuing expansionary monetary and fiscal policies in an attempt to substantially lower the unemployment rate, pershaps to the 4 percent target established by the Council of Economic Advisors in the 1960s or the dientical tartet established by the Humphrey-Hawkins Act of 1978. Today, however, with the emergence of the "natural reate" theory of unemployment, it is generally believed that there is and unemployment limit below which aggregate policies cannot go.

Is it really the case that the official policy of the Fed for almost half a century has been to prevent real increases in wages? Or is the NRU as important to policy makers as the author says?

ljb5
12-23-2014, 04:49 PM
Is it really the case that the official policy of the Fed for almost half a century has been to prevent real increases in wages?

The fed's official policy is to balance the competing goals of low inflation and low unemployment.

I think it has always been understood that these two forces act in opposition to each other and that the economy can only function when they are balanced and hold each other in check.

The definition of the NRU only serves to define where that balance point lies... it does not create the need to find such a balance point.

Certainly increased productivity has an effect on real wages because you can get the same output from your workforce with fewer employees... but I don't think that is caused by Fed policy. Probably has more to do with automation, globalization and the conversion to a service economy.

johnw
12-23-2014, 05:09 PM
Well, the inflation target of 2% doesn't have any real empirical backing. As to the link between the inflation rate and the unemployment rate, that relationship was called the Phillips Curve and a loss of faith in it is what led to using the NRU.

My problem with the definition of the NRU above is that it seeks a balance point at which there is no acceleration or deceleration of inflation, when wages should be inflating at the rate productivity is increasing. Otherwise, you're transferring that wealth created by higher productivity away from wage earners.

http://www.bls.gov/lpc/nfbbar.gif
If productivity is increasing at an average of 2%, shouldn't wage inflation be at least that high? And yet, real wages are about where they were in 1980.

RonW
12-23-2014, 05:21 PM
Really, there is a lot that I blame on the fed, but low wages ain't on the list..Wages are a product of demand and supply.
This problem was seen as early as the JFK years who plainly stated that we have to properly manage tariffs on imports to protect the american workers.
Since then the importation, outsourcing and manufacturing moving abroad has increased dramatically as well as the importation of foreign workers.
Therefore you have a lack of demand for workers and a oversupply well to draw from, therefore pushing wages downward.

And the mission of the federal reserve is -------


The Federal Reserve System is the central bank of the United States. It was founded by Congress in 1913 to provide the nation with a safer, more flexible, and more stable monetary and financial system. Over the years, its role in banking and the economy has expanded.

Today, the Federal Reserve's duties fall into four general areas:

conducting the nation's monetary policy by influencing the monetary and credit conditions in the economy in pursuit of maximum employment, stable prices, and moderate long-term interest rates

supervising and regulating banking institutions to ensure the safety and soundness of the nation's banking and financial system and to protect the credit rights of consumers

maintaining the stability of the financial system and containing systemic risk that may arise in financial markets

providing financial services to depository institutions, the U.S. government, and foreign official institutions, including playing a major role in operating the nation's payments system

http://www.federalreserve.gov/aboutthefed/mission.htm

ljb5
12-23-2014, 05:28 PM
I find it interesting that Republicans have become so passionate about growth of real wages. Mostly just in the last 5 years and 11 months.

Before Obama was in office, keeping wages low was considered 'business friendly.' Back when Clinton was in office, Republicans openly worried that low unemployment would lead to wage pressure and that would be bad for employers.

johnw
12-23-2014, 05:46 PM
Really, there is a lot that I blame on the fed, but low wages ain't on the list..Wages are a product of demand and supply.


http://www.federalreserve.gov/aboutthefed/mission.htm

Regulating supply and demand is the whole point of monetary policy.

I'm not saying that's the only cause of stagnating wages, I'm just saying if a Fed research paper says they are managing labor demand for zero real growth in wages, you're more likely to get zero real growth. Now, I'm largely self-taught in economics, so I may be talking out of the back of my neck, but nothing you've said so far indicates that I am. Yes, the Fed has more than one mandate, but it's been run on monetarist lines since Paul Volker's day. Maybe it's a coincidence that when we changed the theoretical basis for money management, we got different results, but I think the chances are there is some sort of relationship.

ljb5
12-23-2014, 06:12 PM
I'm just saying if a Fed research paper says they are managing labor demand for zero real growth in wages, you're more likely to get zero real growth.

I don't think that's what the paper says.

They are merely acknowledging the fact that there is a natural rate of unemployment. It doesn't say that they are managing policy to achieve that rate.

In fact, the paper actually says that the natural rate is not necessarily the optimal rate... and they go on to discuss ways that the natural rate may be lowered.

Perhaps 'natural' rate isn't really the best term for it. You might call it the rate at which resistance is felt. You can push harder against it, with some success, but each further push yields less benefits and more backlash.

Perhaps the problem is just that we're too squeamish about the backlash, which takes the form of high inflation. We haven't had double-digit inflation in more than 30 years. Lately, it's been more like 1 and 2% (even negative, for a while during the crisis.)

Since we understand that inflation and employment are opposing forces, maybe we ought to loosen the reins a bit, accept 5% or 7% inflation and let employment go on a run for a bit.

seanz
12-23-2014, 06:21 PM
I was reading a Fed document about the natural rate of unemployment (yes, I know, I'm a nerd) and I ran across this:



It seems to me that there's a conceptual problem here. If that's how it is applied in policy terms, we'd see no increase in real wages even if there was an increase in productivity. In fact, if that's the way it is shaping policy, you would expect some time around 1980, when Milton Friedman's ideas began to be applied, a disconnect between productivity growth and wage growth. Something like this:

http://upload.wikimedia.org/wikipedia/commons/thumb/7/73/US_productivity_and_real_wages.jpg/1024px-US_productivity_and_real_wages.jpg

Can it really be that Friedman didn't realize this would happen, or has the application of the theory just been used to transfer wealth from people who work for wages to people who own things? It seems pretty obvious that if your notion of the wage inflation that's appropriate to the natural rate of unemployment doesn't allow for real growth in wages, and you make that an important part of how you determine policy, you'll end up transferring the growth to those who don't work for wages. The mechanism would be to keep enough slack in the demand for workers to suppress worker's ability to negotiate higher wages.

From the same document:



Is it really the case that the official policy of the Fed for almost half a century has been to prevent real increases in wages? Or is the NRU as important to policy makers as the author says?

I have never seen a clearer argument as to why the workers should control the means of production.

johnw
12-23-2014, 06:46 PM
I don't think that's what the paper says.

They are merely acknowledging the fact that there is a natural rate of unemployment. It doesn't say that they are managing policy to achieve that rate.

In fact, the paper actually says that the natural rate is not necessarily the optimal rate... and they go on to discuss ways that the natural rate may be lowered.

Perhaps 'natural' rate isn't really the best term for it. You might call it the rate at which resistance is felt. You can push harder against it, with some success, but each further push yields less benefits and more backlash.

Perhaps the problem is just that we're too squeamish about the backlash, which takes the form of high inflation. We haven't had double-digit inflation in more than 30 years. Lately, it's been more like 1 and 2% (even negative, for a while during the crisis.)

Since we understand that inflation and employment are opposing forces, maybe we ought to loosen the reins a bit, accept 5% or 7% inflation and let employment go on a run for a bit.

Keep in mind, the paper is from 1986. I was reading it because it was written at a time when there was still some pushback against the idea that the natural rate was the optimal rate. If you look at more recent papers, the pushback seems to be gone.

Now, the debate seems to be about what the natural rate is, rather than whether the natural rate is the optimal rate.

http://www.frbsf.org/economic-research/publications/economic-letter/2011/february/new-normal-unemployment-rate/

http://www.frbsf.org/economic-research/files/el2011-05-update.pdf

http://www.brookings.edu/research/papers/2009/07/unemployment-dickens

I had to go back quite a way to find a paper that discussed whether the NRU is the optimal rate.

johnw
12-23-2014, 06:48 PM
I have never seen a clearer argument as to why the workers should control the means of production.

They didn't own the means of production on the first part of the chart, and it was working pretty well for them. Something changed.

johnw
12-23-2014, 07:43 PM
There is some more recent pushback against the NRU (AKA NAIRU, for non-accelerating inflation rate of unemployment.)

You can see part of the reason in this Vox chart:

https://cdn3.vox-cdn.com/thumbor/gAn44vDWNPudKdIngTTv6TXW0hI=/800x0/filters:no_upscale()/cdn0.vox-cdn.com/uploads/chorus_asset/file/2437794/NAIRU_chart.0.png
http://www.vox.com/2014/11/14/7027823/nairu-natural-rate-unemployment

The first thing you notice is that unemployment used to spend a lot of time under the NRU, but since about 1980 unemployment has generally been above the NRU. The next is that the natural rate seems to vary over time, justifying less stimulus in times of high unemployment.

Now, look at the history of American inflation:

http://www.aboutinflation.com/_/rsrc/1369736776695/inflation-rate-historical/us-inflation-rate-historical-chart/US_Inflation_Rate_Historical_1916_2012.png
http://www.aboutinflation.com/inflation-rate-historical/us-inflation-rate-historical-chart

That period below the natural rate in the late 1990s didn't spark a huge amount of inflation.

seanz
12-23-2014, 07:44 PM
They didn't own the means of production on the first part of the chart, and it was working pretty well for them. Something changed.

Pah! They were living in an illusion.



:)

johnw
12-23-2014, 07:49 PM
Pah! They were living in an illusion.



:)

False consciousness? That's just an excuse for why so few working men like Marxism!

...and this is why Marxists can't stand liberals.