Further reasons to reject NAIRU lock, stock, and barrel

25 Sep, 2014 at 15:19 | Posted in Economics | Comments Off on Further reasons to reject NAIRU lock, stock, and barrel

This paper has reasserted the Post Keynesian view that unemployment is essentially driven by private investment behaviour. There is a feedback from the labour market via price and wage inflation to the goods market, but it is weak. Without government policy the goods market reactions may even be perverse and, as we are presently reminded, the scope of monetary policy is limited in times of financial crises and in times of deflation. Second, the labour market itself is more adaptive than commonly assumed. The NAIRU is endogenous due to the supply-side effects of capital accumulation and the importance of social norms in wage setting. Thus, there is a well defined NAIRU that determines wage and price inflation (in conjunction with actual unemployment) in the short term, but it is endogenous and changes along with actual unemployment in the medium term. …

lock-stock-and-two-smoking-barrels-poster-bigWhile monetary policy exerts some impact on investment decisions, there may be other reasons for private investment to fall below the level necessary for full employment. Keynes himself had famously argued that it is mostly driven by animal spirits, which leaves the economic analyst in the dark as to what actually drives them. To some extent these animal spirits will depend on specific institutional structures and the degree of uncertainty regarding the future evolution of important macroeconomic variables … or corporate governance structures; but overall it is fair to say that investment expenditures cannot be easily reduced to underlying variables.

Our analysis has important policy implications. Rather than regarding the role of the state as having to provide conditions (in the labour market) as close as possible to perfect markets, our analysis highlights the role of the state as a mediator of social conflict and as a stabiliser of economic activity. If the private sector is prone to long-lasting swings in economic activity (due to changes in animal spirits or the aftermath of financial crises) and the NAIRU is endogenous, maintaining employment at high level in the short run is crucial. To that end monetary policy will in general not be sufficient and an active (counter cyclical) fiscal policy is needed. Finally, wage policy is crucial in terms of controlling inflation as well as in terms of stabilizing income distribution. Wage flexibility will not cure unemployment … Fiscal policy is the main tool of short run stabilization and wages policy aims at wages growth in line with labour productivity.

Engelbert Stockhammer

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