Re: [Pen-l] The Natural Rate vs NAIRU

["Jim Devine" <jdevine03@xxxxxxxxx>]

Maxim Linchitswrote:
> I am trying to understand the similarities and difference between the
> Monetarist NR and the neo-'Keynesian" NAIRU.

I don't know of any real difference between these two concepts except
that the latter's name is more scientific-sounding. There are more
than one theory behind these two, though. (See below.) I guess we
could associate the NR with one theory and the NAIRU with the other,
but there's no agreed-upon convention.

> Is there any theoretical
> rationale for the *accelerating*-rate hypothesis (as opposed to the
> old Phillips Curve) besides the natural rate theory?

the usual explanation is simply adaptive expectations (persistent high
inflation --> inflationary expectations) feeding back to shift the
short-run Phillips curve. By the way, as far as I can tell, this story
does not originate with Friedman and Phelps but with Abba Lerner, an
early Keynesian. (See his THEORY OF EMPLOYMENT and later works, like
FLATION.)

> Do economists and
> policy makers who still think NAIRU is a meaningful concept usually
> rely on assumptions about an equilibrium wage below which workers
> would refuse to work and above which employers would refuse to hire?

there are two theories here. First is the Friedman/Phelps story of
workers being temporarily fooled by inflation and being willing to
work for real wages below what they would normally accept (if they
weren't fooled). When workers aren't fooled, the supposed aggregate
labor market operates where the supply of labor curve intersects the
demand for labor curve and all unemployment is structural or
frictional (or due to rigid real wages).

The other theory is that of David Soskice, which seems to have been
taken over by Olivier Blanchard and a lot of other new Keynesians
without any kind of attribution. It's a version of the conflict theory
of inflation, with workers struggling to maintain their real wages and
employers protecting their profit margins. Since workers are less &
less able to struggle as unemployment rises, there's a specific level
of unemployment that reconciles the competing claims over the
distribution of the product with a stable rate of inflation. (with U
on the horizontal axis, the workers' desired real wage rises as U
falls, while the real wage determined by the capitalists' profit
margin is independent of the U rate. The two curves intersect,
producing an equilibrium.)  This equilibrium is the NAIRU which has
more unemployment (a "reserve army") on top of structural and
frictional unemployment.

a basic problem with the whole NR/NAIRU literature is that the
equilibrium unemployment posited by either theory changes its value
over time, while its estimates have large margins of error. On the
latter issue, Lerner distinguished between high full employment and
low full employment, acknowledging the existence of a range of "full
employment" unemployment rates.  It's also possible to interpret his
theory as saying that "high full employment" corresponds to the
Friedman/Phelps imaginary situation where all unemployment is
structural or frictional and that "low full employment" corresponds to
rate of unemployment that keeps inflation stable in the Soskice story.
Lerner proposed various ways to make markets more efficient
(basically, incomes policies) as a way to allow the economy to attain
the superior "high full employment" situation.

I also think there's good reason to see the long run Phillips curve
having a slope.

> Also (I got this from Dean Baker's paper) does the fact that real
> wages and quit rates tend to be procyclical make the natural rate
> theory fanciful nonsense? In other words, doesn't the natural rate
> theory imply that the sub-NR unemployment experienced during booms
> must be attended by deceptively high (lower real) wages to fool
> workers into working more? And that workers, once they catch on to the
> fraud, will quit their jobs, driving the unemployment rate and real
> wages up during recessionary periods?

I'll think about it and reply when I'm awake.
-- 
Jim Devine / "Segui il tuo corso, e lascia dir le genti." (Go your own
way and let people talk.) -- Karl, paraphrasing Dante.
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