Unemployment rates

Brett Knowlton brettk at unica-usa.com
Thu Sep 3 11:05:13 PDT 1998

Brad DeLong wrote:
>Arthur Okun and company thought that the NAIRU had successfully been
>breached in the 1960s--that they could run the U.S. economy without
>structural changes at 4% unemployment and 2% inflation forever. The result
>was the 1970s--and the fall of social democracy as a governing ideology.
>Be very, very careful before you try to repeat their mistakes: better to
>have 4.5-5.0% unemployment than to have a few years of 3.0-4.0%
>unemployment followed by OPEC Shock III, productivity slowdown II, and the
>second coming of Ronald Reagan.

I have some fundamental questions about the unemployment rate itself. Why does it exist in the first place? Is there any THEORETICAL underpinning to the notion of a NAIRU? Why is it that the unemployed 5% (or whatever it is) can't be added productively to the economy? I mean, there's no law of physics which states than Unemployment < NAIRU = inflation, is there?

I know the standard line is that output won't go up, so unemployment rates which are less than the NAIRU only cause inflation. Is this simply an empirical assertion, or is there more to it? When you take into account the fact that the REAL unemployment rate is 50-100% greater than the official unemployment rate due to underreporting and the like, it is a fairly profound statement to say that 7-10% of the population is superfluous in terms of output.

Secondly, you could argue that this is a good thing from a distributional standpoint. Why isn't it better to have everyone employed and earning a payckeck, albeit with inflation, than to have no inflation and 5% of the population permanently on the outs, relying on gov't assistence or some form of charity for survival?

Is this peculiar to capitalist economies, or all economies? Are there other economic systems which could eliminate unemployment? I want to know what you all think about this.


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