The Natural Rate of Unemployment

“Full employment” does not mean 100 percent employment. For various reasons, the unemployment rate cannot be reduced to zero, if only because people are always being fired, laid off or moving between jobs. But even granting that unemployment can never be completely eliminated, it still might be possible to ensure that anyone searching for a job can find one reasonably quickly. Economists call this happy state of affairs “full employment”.

How can it be reached? Early Keynesians believed that they could achieve it by expanding the money supply. Of course they could not overdo it. The central bank could expand the money supply right up to the point where full employment was reached; after that, any money expansion would result in inflation. The question was how much to expand.

An apparent answer emerged in 1959, when British economist A.W. Phillips discovered a relationship between wages and unemployment in British historical statistics. When unemployment was high, wages had fallen; when unemployment was low, wages had risen. A look at American statistics revealed the same tradeoff. Since wage changes are indicators of inflation, this discovery actually showed that a tradeoff existed between inflation and unemployment. Accepting more of one meant less of the other. When graphed, this tradeoff produced a nice, neat curve, which became known as the “Phillips curve”.

This discovery helped policy-makers determine how much to expand the money supply. Previously, no one really knew what constituted “full employment”. The curve showed them how far they could expand the economy without letting the cost of inflation outweigh the cost of unemployment. This seemed to be 3 or 4 percent inflation in return for 4 percent unemployment.

Over the next few decades, many public figures would call for the unemployment rate to be reduced to 4 percent; the 1978 Humphrey-Hawkins Act went so far as to put it into law. But economic events and advances in theory would overtake them. In 1968, Milton Friedman challenged the whole concept of the Phillips curve, and his efforts would secure him lasting fame and the 1976 Nobel Prize.

Friedman showed that monetary policy could not be used to achieve full employment. Unfortunately, inflation starts accelerating before full employment is reached. The best a nation can do is settle for the lowest level of unemployment that will not begin accelerating inflation. Friedman called this point the “natural rate of unemployment”.

Some controversy exists over what the natural rate is, because it depends partly on what markets expect inflation will be. But in U.S. today, economists estimate it to be slightly less than six percent. Friedman is said to regret the term “natural rate of unemployment”, since it implies a certain amount of unemployment is acceptable. Therefore, most economists prefer to use the euphemism “NAIRU”, which stands for Non-Accelerating Inflation Rate of Unemployment”.

The natural rate of unemployment does not mean that Keynesianism is still not a useful tool for smoothing out the business cycle. Six percent is merely an average; in reality, unemployment can deviate substantially from 6 percent. Keynesian policies are therefore useful for stabilizing unemployment at this figure.

As one might expect, the natural rate of unemployment is not without controversy. Although most top-level economists – on both the left and the right – accept its validity, there are many economists who believe the NAIRU doesn’t even exist. A much more widespread controversy, though, is where to peg the natural rate. Nearly all economists agree that it is not a fixed figure, but it can float.

And this debate has a political cast as well: conservatives, or “inflation hawks”, like a high NAIRU, liberals, a low one. When it’s high, interests on bonds pay more, thanks to low inflation. Conservatives like that because most bond-holders are wealthy. Furthermore, when the unemployment rate is high, wages tend to fall, in accordance with the laws of supply and demand on the labor market. Conversely, liberals prefer a low NAIRU because it raises workers’ wages.

Notes

1. granting that… -допустим, что...
2. Keynesians –сторонники экономического учения Keynes’а (1883-1946)

Keynesianism –кейнсианство: экономическое учение Кейнса, основанное в значительной мере на ключевой роли государственных расходов и налогов в поддержании экономического роста. По его мнению, недостаточный общий спрос вызывает безработицу, а чрезмерный – инфляцию, поэтому государство должно стремиться регулировать совокупный спрос с помощью госрасходов и налогов

3. historical statistics – статистические данные за определенный период

прошлого

1. the Phillips curve – “кривая Филлипса”: кривая взаимодействия инфляции и

безработицы

1. Humphrey-Hawkins Act – The Full Employment and Balanced Growth Act (Закон о полной занятости и сбалансированном росте экономики)

Vocabulary

to expand the money supply – увеличить объем денежной массы в обращении monetary expansion – увеличение денежной массы в обращении

tradeoff – компромисс; здесь: взаимозависимость

the Phillips curve – кривая Филлипса

to challenge (the concept) – поставить под сомнение (идею)

to peg – привязывать; здесь: определить уровень; pegging – привязка цены или курса валюты к определенному ценовому ориентиру, индексу, валюте или корзине валют

bond – облигация; interest on the bond – проценты, выплачиваемые по облигации

inflation hawks – члены ФРС, стремящиеся не допустить высокий уровень инфляции и требующие проведения мер по борьбе с ней ( путем повышения процентных ставок)

Exercises

1. Find in the text synonyms to the following:

to get rid of, to dismiss, to suspend from employment during a slack period, redundancy, an enlargement, a collection of numerical data, to make an exchange of one thing for another, ten years, to call into question, to increase the speed of, medium, a certificate of debt issued by the government.

1. Find the equivalents in the text:

уровень безработицы нельзя свести к нулю, относительно быстро найти работу, признавать обоснованность термина, с этим нельзя переборщить, сильно отличаться от уровня в 6%, обнаружилась та же взаимная зависимость, из чего складывается полная занятость; дело дошло до того, что был принят закон, по подсчетам экономистов, он оспорил саму идею.

1. Make up 5 sentences with the phrase “granting that”.

1. Translate the following paying attention to the underlined words:
1. While on a holiday, my wife wouldn’t let me take any work with me.
2. He would play crib (карточная игра) with zest and would allow no argument.
3. And, as the late Tommy Cooper would say, that’s not all.
4. I would go across the road to Mr. and Mrs. Hall’s on a Saturday night and would watch Benny Hill one week and Dave King the next.
5. All existing records would be broken, and profits would flood in as the skiing rich flocked to resorts.
6. Some would suffer from the cold, others from the heat, and still others would become badly hurt.
7. Grandma would use a flower for her buttonhole when she went to church.

1. Do exercise 8 on page 61, and exercise 15 on page 67 in the Krasnov file.

By James C.Cooper