The NRU or NAIRU is, given current conditions, the lowest unemployment rate an economy can reach WITHOUT triggering inflation. If the actual unemployment rate observed in the economy equals the NRU, then the economy is said to be at full-employment. You can see from the first graph below (the BLUE line) that the NRU has hovered consistently between 5% and 6% since 1949. The RED line represents the actual unemployment rate at a given time.
When the actual unemployment rate goes below the NRU, this means there is a relative scarcity of labor (skilled and unskilled, but skilled is probably more relevant) in the marketplace. Wages tend to increase during this period of time. When the actual unemployment rate goes above the NRU wages tend to stagnate because there is a relative surplus of labor available in the marketplace. What do you notice about the trend between the NRU and the actual unemployment rate over time?
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Source: Jared Bernstein |
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| Source: Jared Bernstein |
Two things SHOULD happen as a result--1. Workers produce more, the business makes more money, the workers get paid more (2) Workers produce more, the business makes more money and they hire more workers.
As you look at the graph below, remember--productivity gains should translate into income gains for workers....
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| Source: Jared Bernstein |
Pretty shocking, isn't it? Prior to 1979 wage growth keep up with worker productivity. After 1979 wage growth was stagnant relative to gains in productivity.
What went on in the mid-1970's to change this? If my friend over at The New Arthurian Economics is reading this, I THINK he has the answer.. Try HERE and HERE to get started...
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Wow! Thanks, Gene.
ReplyDeleteHow was the vacation?
Interesting graphs. One thing I would do different... Bernstein divides the 1947-2009 period almost in half, with a break at 1979. Breaking it in half does make sense. But on the "NAIRU and Unemployment" graph, just by eye, it looks like the change happened around 1974, not 1979.
To my mind, 1979 is associated with 1980 (and Reagan)... 1974 is associated with a severe recession. I always prefer economic explanations to political ones. I like to point to policies, not presidents.
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RE your "two things should happen" paragraph -- Workers produce more, the business makes more money, and
1. the workers get paid more, and
2. the business hires more workers.
Yeah, *should* happen, as part of the process. Doesn't seem to happen. But the failure of the process does seem to be absent from a lot of economic analysis.
Art
Art--You believe you are correct about 1974 rather then 1979. At first I DID put 1974 where you see 1979 as it looked like to me that when the break started. I changed it to be consistent with Bernstein. That certainly was a political move on his part to closer associate the trend with Reagan (rightly or wrongly). I should have gone with my own instinct...
ReplyDeleteShould have started out "I believe you are correct" OF COURSE you would believe you are correct!!! :) I need to hire a proof-reader... :)
ReplyDelete:)
ReplyDeleteImportant to me, because if the problem started with Reagan, that's one thing. But if the problem started before Reagan, then Reagan's policies were offered (rightly or wrongly) as a solution.
There are a lot of people who think we could fix the economy by abandoning Reaganomics. But if there was a pre-existing problem, abandoning Reaganomics does not solve it.