Solow on the non-existence of a ‘natural rate of unemployment’

4 Nov, 2018 at 11:23 | Posted in Economics | 4 Comments

mythbusting The second, and even more striking, contribution of the 1968 presidential address was Friedman’s introduction of the ‘natural rate of unemployment’ along with the long-run vertical Phillips curve and its accelerationist implications. The natural rate was, famously, what would be ‘ground out’ by Walrasian general equilibrium, provided it incorporated ‘the actual structural characteristics of the labor and commodity markets, including market imperfections, stochastic variability in demands and supplies, the cost of gathering information about job vacancies and labor availabilities, the costs of mobility, and so on.’ (Was that tongue-in-cheek? How on earth was anyone to guess what the natural rate might be, this quarter or next?) …

Olivier Blanchard (2016) has recently looked carefully and impartially at the years since 1980 and come to the following conclusions. First, there is still a Phillips curve, in the sense that inflation responds to unemployment. Second, expectations of inflation have become more and more ‘anchored,’ meaning less and less dependent on current and recent experience … Third, the slope of the Phillips curve itself has been getting flatter, ever since the 1980s, and is now quite small. And last, the standard error around the Phillips curve is large; the relationship is not well defined in the data.

Taken together, these last two findings imply that there is no well-defined natural rate of unemployment, either statistically or conceptually …

So why did those thousand ships sail for so long, why did those ideas float for so long, without much resistance? I don’t have a settled answer.

One can speculate. Maybe a patchwork of ideas like eclectic American Keynesianism, held together partly by duct tape, is always at a disadvantage compared with a monolithic doctrine that has an answer for everything, and the same answer for everything. Maybe that same monolithic doctrine reinforced and was reinforced by the general shift of political and social preferences to the right that was taking place at about the same time. Maybe this bit of intellectual history was mainly an accidental concatenation of events, personalities, and dispositions. And maybe this is the sort of question that is better discussed while toasting marshmallows around a dying campfire.

Robert Solow

4 Comments

  1. If Solow thinks there is no relation between inflation and unemployment, why doesn’t he advocate a massive increase in demand so as to cut unemployment to near zero? Reason is that like all the other people who claim that relationship does not exist, he knows perfectly well that the relationship DOES EXIST.

    • I took Solow to be explicitly endorsing the notion of a relation between inflation and unemployment, by invoking Blanchard with approval:
      .
      . . . there is still a Phillips curve, in the sense that inflation responds to unemployment.
      .
      Your complaint appears misplaced.

      • Good point. On the other hand he says ” there is no well-defined natural rate of unemployment, either statistically or conceptually …”. He seems to contradict himself.

        • There is no well-defined natural rate of unemployment, either statistically or conceptually. That is just a fact.
          .
          It seems to me that one might hold any number of views that would recognize various relationships between inflation and the rate of unemployment, without positing a general market equilibrium rate of unemployment as either possible or actually functioning as an immanent attractor to organize the economy efficiently.
          .
          Solow is not innocent. I think he is protesting here against intellectual crimes he had a major part in perpetrating back in the day (late 1950’s, early 1960’s).


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