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Questioning the natural rate of unemployment
7th January 2010
Roger Farmer questions the existence of a stable natural rate of unemployment in this post to the Vox Blog.
He focuses his attention on the Beveridge Curve which tracks three macroeconomic variables - unemployment, inflation and the level of unfilled job vacancies. He argues that the religious adherence to a natural rate concept (an equilibrium rate of unemployment to which an economy gravitates over time) has little empirical support. Each and every recession in the USA has had a permanent effect on the unemployment rate - he supports the idea of hysteresis in the labour market.
“When households feel wealthy, that belief is self-fulfilling. Consumers spend a lot, firms hire workers, and the economy comes to rest at a point on the Beveridge curve with low unemployment and high vacancies. When the values of houses, factories, and machines fall, households spend less, firms lay off workers, and the economy comes to rest at a point on the Beveridge curve with high unemployment and low vacancies. Both situations – and anything in between – are zero-profit equilibria. High inflation makes the trade-off between unemployment and vacancies less favourable, and in the steady state, any inflation rate is consistent with any unemployment rate.”
Geoff Riley
Geoff Riley FRSA has been teaching Economics for over thirty years. He has over twenty years experience as Head of Economics at leading schools. He writes extensively and is a contributor and presenter on CPD conferences in the UK and overseas.