Forget about inflation, its unemployment that matters

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Forget about inflation, its unemployment that
matters

• Joan Muysken
• Center of Full Employment and Equity in Europe

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Papers

• with Bill Mitchell
• The Brussels-Frankfurt consensus An answer to
  the wrong question
• Involuntary unemployment getting to the heart
  of the problem
• on the SGP
• The Stability and Growth Pact Stability nor
  Growth

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Structure

• The wrong and the right questions
• The European debate
• disequilibrium vs. the NAIRU
• separation macro policy - unemployment
• labour market gt OECD Jobs Study gt EES
• macro policy gt Brussels-Frankfurt consensus
• Stability and Growth Pact

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Declining misery index

• Misery index inflation unemployment
• Decline in misery indices seems great achievement
• Problems in Japan and Germany

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Misery indexes (percent) for
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Wrong and right questions

• Decline in misery indices seems great achievement
• Share of inflation in misery from 50 to 25
• reflects overwhelming focus on price stability
• at detriment of growth and employment
• Focus should be on unemployment

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Notions of unemployment shifted over time

• From voluntary unemployment
• to involuntary unemployment
• to full employment
• to the natural rate of unemployment ..
• to the NAIRU
• to involuntary unemployment ?

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The natural rate of unemployment

• the level that would be ground out by the
  Walrasian system of general equilibrium
  equations, provided there is imbedded in them the
  actual structural characteristics of the labor
  and commodity markets, including market
  imperfections, stochastic variability in demand
  and supplies, the cost of gathering information
  about job vacancies and labor availabilities, the
  costs of mobility, and so on. (Friedman)

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The new-classical denial of involuntary
unemployment

• Lucas
• there is an involuntary element in all
  unemployment, in the sense that no one chooses
  bad luck over good there is also a voluntary
  element in all unemployment, in the sense that
  however miserable ones current work options, one
  can always choose to accept them.

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Lucas view

• Treating unemployment as voluntary focuses
  discussion of monetary and fiscal policy on
  stabilization, on the pursuit of price stability
  Some average unemployment rate would, of course,
  emerge from such a policy but as a by-product,
  not as a preselected target.

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Divergent debates on either side of the Atlantic

• United States
• Rational Expectations ) focus
• New Classical Economics ) mainly on
• New Keynesians ) inflation
• Europe
• Disequilibrium economics
• NAIRU-approach

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Unemployment Europe and US
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The European debate I

• Disequilibrium Economics
• Malinvaud theoretical stimulus
• Drèze and Bean
• European Unemployment Programme
• Two handed policy advice
• wage constraint
• stimulate aggregate demand
• government investment

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The European debate II

• The NAIRU approach
• dual nature of equilibrium unemployment
• Friedmans natural unemployment
• policy inflicted
• Effective separation of macroeconomic policy and
  unemployment
• unemployment focus on labour market policies
• stressing role of wage formation and search
• special attention to role of the long-term
  unemployed

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NAIRU battle between mark-ups
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Wage increase gt higher un
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Deficient NAIRU-approach

• Three lines of attack
• theoretical
• cap. costs AD hysteresis near/bounded
  rationality
• empirical
• time varying asymmetries imprecise estimations
• policy advise
• weak link inflation/unempl.
• too strong a focus on inflation stifles output
  growth

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An example the Dutch NAIRU

• Varies strongly with actual unemployment
• clear cyclical movements

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Unemployment NL, 1974 - 2003
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the Dutch NAIRU II

• Varies strongly with actual unemployment
• clear cyclical movements
• Cyclical variation of structural variables
• wedge replacement rate

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Structural variables cyclical
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the Dutch NAIRU III

• Varies strongly with actual unemployment
• clear cyclical movements
• Cyclical variation of structural variables
• wedge replacement rate
• Hysteresis is strongly present

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Dutch Hysteresis, 1974 2003
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The NAIRU and capacity utilisation, 1974 2003
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the Dutch NAIRU IV

• Varies strongly with actual unemployment
• clear cyclical movements
• Cyclical variation of structural variables
• wedge replacement rate
• Hysteresis is strongly present
• Shifts in U and V vs. matching efficiency

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Phase diagrams for U and V
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the Dutch NAIRU and matching efficiency

• Recessions
• Outward shifts in unemployment attractors
• decreased matching effciency
• Inward shifts vacancies attractors
• increased matching efficiency
• Tendency to stick at attractors
• consistent with hysteresis
• negative impact of adverse demand shocks

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OECD Jobs Study and EES

• OECD used Jobs Study to position itself
• striking similarities with Stiglitz on IMF
• NAIRU in economic policy in mid-1990s
• European Employment strategy follows
• similar ideological background and
  recommendations, BUT
• different implementation
• open coordination method

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SGP Stability nor Growth

• zero budget deficit
• inconsistent with golden rule
• inconsistent with debt stability
• new member states should invest!
• no fiscal policy possible
• constrains automatic stabilisers
• ideological argument against cut backs in G
• given one-size-fits all monetary policy

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Brussels Frankfurt Consensus

• The maintenance of price stability reflected in
  low rates of inflation facilitates achieving
  higher rates of economic growth over the medium
  term and helps to reduce cyclical fluctuations.
• sound public finances are .. helping to foster
  private investment and ultimately growth.

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Stimulating economic growth I

• Increase government expenditures
• allow for deficit spending
• as in Germany and France
• economy needs liquidity injection
• compare situation in Japan and US
• Job Guarantee
• unconditional job offer at minimum living wage

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Stimulating economic growth II

• ECB should buy and sell
• economy needs liquidity injection
• compare situation in Japan and US
• increase export performance
• compare Germany pre-unification
• not through wage reductions
• Dont be afraid of inflationary pressures
• wage policies might be implemented

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Concluding remarks

• The Brussels Frankfurt Consensus is an answer to
  the wrong question
• unemployment should not be used as policy
  instrument to contain inflation
• the NAIRU-connection between unemployment and
  inflation is very weak
• The Stability and Growth Pact brings neither
  stability nor growth

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