ANALYSIS--Labor/inflation theory nears last breath...
Source Jim Devine
Date 99/05/13/03:43

>IN THIS MESSAGE: ANALYSIS--Labor/inflation theory nears last breath...
>Monday May 3, 3:15 pm Eastern Time
>ANALYSIS--Labor/inflation theory nears last breath
>By Isabelle Clary
>NEW YORK, May 3 (Reuters) - It seems like just about everyone is working in
>the United States, except the Phillips Curve -- a once-popular economic
>theory that could have cost millions of Americans jobs if Federal Reserve
>Chairman Alan Greenspan did not have his doubts about it.
>The Phillips Curve theory, named after British economist A.W. Phillips,
>holds that wages rise faster when demand for labor is strong -- as should
>be the case in America where the jobless rate today is at a 29-year low of
>4.2 percent.
>However, unemployment and inflation have steadily fallen hand in hand over
>the past four years.
>``I must say, I'm blown away by the last two ECI reports,'' admitted former
>Fed Vice Chairman Alan Blinder, commenting on the broad measure of U.S.
>labor costs known as the Employment Cost Index.

Even though it's nice to see Blinder being embarrassed, I think it's a
mistake to simply toss the Phillips curve out (and it's been done before,
by conservative "new classical" economists, when inflation and unemployment
both rose).

The idea of the PC is that as unemployment falls, all else equal, inflation
rises. The way I interpret this connection is in terms of rising worker
bargaining power threatening to squeeze profits, which under certain
conditions means inflation as bosses use their pricing power to protect
their profits.

The crucial clause is "all else equal," since usually "all else" isn't
equal in the real world. That is, the PC _shifts_. There are lots of good
reasons to say that the PC shifted in the US, so that falling inflation is
associated with falling unemployment. Some of them include:

(1) the US Bureau of Labor Statistics has redefined its measures of the
inflation rate, downward;
(2) oil prices have generally been down;
(3) crucial products like computers are cheaper;
(4) workers are more insecure in their jobs, meaning that any given
(official, overt) unemployment rate has a greater power to deter wage
(5) labor unions are in big trouble, weakening worker bargaining power;
(6) the welfare state has been undermined, weakening worker bargaining power;
(7) increasingly fierce competition for exports and from imports has
limited US business' ability to increase prices to protect prices, making
them more prone to play "hard ball" against workers; and
(8) until recently, the duration of unemployment spells has been longer
than usual for the prevailing unemployment rates.

As Bob Pollin notes in his article in a recent REVIEW OF RADICAL POLITICAL
ECONOMICS, the situation of US labor-power market is trending in the
direction of that of Mexico, where little overt unemployment is needed to
prevent inflation.

To toss out the PC because it doesn't explain recent economic behavior is
like throwing out a market demand curve because one sees falling prices and
falling quantities over time. The problem is not with the PC -- except that
it is a superficial description of reality.

>Some experts, like Nobel-Prize winner Milton Friedman, drew from Phillips's
>observations the notion of a natural rate of unemployment -- meaning that,
>for one reason or another, there always are people who are unemployed.
>``From there, others inferred it's possible to identify an unemployment
>rate level that would predict future inflation because all goods and
>services prices would go up from there. They were proven wrong in the
>recent years,'' Resler added....

Yes, the NAIRU [the Non-Accelerating Inflation Rate of Unemployment, a more
scientific name for the "natural rate of unemployment"] has fallen, due to
several of the factors listed above. But does that mean that the US economy
could have 1 or 2 percent unemployment for very long without the
capitalists punishing us with faster and faster inflation? If not, a
version of the NAIRU still applies.

In any case, some of the fall in the NAIRU is an illusion, since 4.3
percent unemployment now has greater oomph than it did in (say) 1979 or
1969, greater ability to scare workers and discipline their labor.

Jim Devine &
Bombing DESTROYS human rights. US/NATO out of Serbia now!

[View the list]

InternetBoard v1.0
Copyright (c) 1998, Joongpil Cho