[Economics] #NAIRU the natural Unenmployment Rate 2019-10-12

International an unemployment rate that is considered natural has been established itself in authorities. On the basis of this theory politics and decisions are being made internationally and in the EU. On closer inspection however other consequences and conflicts of interest can be observed.
  1. The Basics of Unemployment and Inflation
  2. NAIRU (Non Accelerating Inflation Rate of Unemployment)
  3. Critique

The Basics of Unemployment and Inflation

Economically unemployment is a lack of work or oversupply of potential work. With unchanged working conditions and weekly working hours unemployment is a concrete lack of need for workers. As a rule unemployment is divided into five different forms.
  • Seasonal unemployment depends on the season because for example the construction industry declines in the winter.
  • Frictional unemployment occurs when workers change jobs and are unemployed for a short time.
  • Structural unemployment includes certain areas such as crises or closures in mining or a region and require above-average efforts to overcome them.
  • Economic unemployment is accompanied by an economic downturn and can lead to mass unemployment.
  • Technological unemployment is caused if the increased supply of goods and services is not demanded through automation and rationalization because of corresponding wage increases.
Frictional and structural unemployment are phenomena depending on the nature and nature of the economy. Seasonal, cyclical and technological unemployment on the other hand are all different shortages of demand for goods and services in an economy. Technological progress through automation and rationalization may be considered as a constant. However a corresponding increase in wages and consequently corresponding demand does not occur regularly. However if there is a lack of demand in the economy then one actor must intervene.

For this the state can either increase government spending and thus pursue counter-cyclical fiscal policy. However the state can also increase the wage share through the minimum wage and working conditions if demand builds up in the upper income classes due to the purchasing power. The wage rate is the share of the employees' income from the entire disposable income in an economy. And the lower the wage share the more domestic demand will fall. This is also because with rising incomes people start to save and with decreasing income people are less able to save.

The unemployment rate also depends on inflation. With an increase in the supply of workers and a constant demand for workers the equilibrium price in the form of wage levels falls. And as the supply of workers continues to decline while demand for workers remains constant the equilibrium price rises in the form of wage levels. In addition the wage level is inevitably part of the price development and thus of inflation.

NAIRU (Non Accelerating Inflation Rate of Unemployment)

In economics the concept of Non Accelerating Inflation Rate of Unemployment (NAIRU) has been established. This is the unemployment rate which will set itself at a constant inflation rate in the long run. It is assumed that unemployment will fall as inflation accelerates, as inflation lowers purchasing power and thus labor costs and as a result corporations hire more workers. And vice versa it is assumed that unemployment rises when inflation slows down. Both assumptions are based on the fact that nominal wages are usually fixed for a longer period of time. [1,p.172ff] [2,p.1ff]

According to the concept of NAIRU there are two deviations from it. When the unemployment rate falls inflation accelerates. The reason is that the wage increases are passed on by the companies through rising prices. And when the unemployment rate rises inflation slows down. [1,p.181ff] [1,p.199ff] [2,p.1ff]

The idea for NAIRU comes from the fact that there is an unemployment rate that sets in the long run and naturally. Deviation from this is only possible with accelerated inflation. And without permanent intervention for example through counter-cyclical fiscal policy the unemployment rate rises again to the level of NAIRU.

Critique

Various states with the euro as currency have been in crisis for a long time and have unemployment rates of 10%, 20% or almost 30%. Nevertheless the EU-Commission uses its own figures for the natural unemployment rates (NAWRU/Non-Accelerating Wage Inflation Rate of Unemployment). According to the 2017 figures the EU-Commission considers unemployment rates of 13.5% for Greece, 15.9% for Spain, 9.5% for France, 10.1% for Italy, and 9.2% for Cyprus as normal. Local people will probably see this supposed normality different. [4]

It is questionable whether an entire economy should accept the calculation of the unemployment rate from one individual authority. The authority that has the task of determining this unemployment rate could implement a completely different agenda. And since NAIRU and NAWRU are concerned with limiting inflation and the official NAWRU figures are very high anyway it can be assumed that actually higher wages should be prevented.

However when one site dictates conditions it is right to speak of a market failure. And when wage levels stagnate permanently it also reduces the incentives for employers to increase labor productivity through investment. Stagnating wages thus hinder technological progress and labor productivity growth.

[1] OECD Economic Studies No. 33, 2001/II - ESTIMATING THE STRUCTURAL RATE OF UNEMPLOYMENT FOR THE OECD COUNTRIES
http://www.oecd.org/social/labour/18464874.pdf
[2] EUROPEAN ECONOMY - Economic Papers 455 | May 2012 Structural unemployment and its determinants in the EU countries
https://ec.europa.eu/economy_finance/publications/economic_paper/2012/pdf/ecp_455_en.pdf
[3] Sind 14 Prozent Arbeitslose schon zu wenige? 2019-02-27
https://www.manager-magazin.de/politik/europa/arbeitslosigkeit-in-spanien-laut-eu-zu-niedrig-a-1255221.html
[4] AMECO
https://ec.europa.eu/economy_finance/ameco/user/serie/SelectSerie.cfm
[5] On Econometrics with a Human Face and Business Cycles: A Reply to Fioramanti and Waldmann’s Criticism on the EU’s NAWRU Methodology - ECONOMIC BRIEF 022 | MARCH 2017
https://ec.europa.eu/info/sites/info/files/eb022_en_0.pdf

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