strategy+business, August 19, 2020
by Theodore Kinni
Photograph by Katja Kircher
It’s usually eye-opening when the economic assumptions that underlie a society are questioned. In The Case for a Job Guarantee, by Pavlina R. Tcherneva, an associate professor of economics at Bard College and a research scholar at the Levy Economics Institute, that assumption is embedded in the concept known as the non-accelerating inflation rate of unemployment (NAIRU).
NAIRU assumes that when the unemployment rate gets too low, it will force companies to raise wages and then prices, causing inflation. This leads economists to try to suss out the optimal rate of unemployment, and the Federal Reserve to try to slow investment and hiring whenever the ranks of the unemployed grow too thin — cold comfort when you are in those ranks.
“The idea that involuntary unemployment is an unfortunate but unavoidable occurrence, and that there is an appropriate level of unemployment necessary for the smooth functioning of the economy, is among the great, unexamined myths of our time,” declares Tcherneva in this concise polemic. “It is also bad economics.”
The actual nature of the relationship between unemployment and inflation is an unsolved mystery, according to Tcherneva. Moreover, the Fed has no “reliable” theory of inflation — even though the Fed began to claim, starting in 2014, that the U.S. economy was at full employment. (Never mind the 3 to 4 million people who were unemployed and seeking work.)
The assumption that there is an optimal level of unemployment comes with harsh ramifications. Unemployed people are less healthy and suffer higher rates of suicide and mortality. Their lifetime earnings shrink, and they often must be supported by social welfare programs as they try to find to work. Chronic unemployment causes communities to decline and collapse. In macroeconomic terms, unemployment depresses GDP growth — Tcherneva cites an analysis by Australian economist Bill Mitchell, who calculated a decline of nearly US$10 billion in output per day caused by unemployment during the Great Recession in the U.S. (versus output if the “full” employment rate at 2.8 percent per annum average GDP growth of 2003–07 had held).
“What if we changed all that,” asks Tcherneva, “and made it a social and economic objective that no job seeker would be left without (at a minimum) decent living-wage work?” The solution she strongly advocates is a job guarantee: a commitment by the government to provide everyone who wants to work with a job. If a job is not available in the private sector, it will be provided in the public sector...read the rest here
“The idea that involuntary unemployment is an unfortunate but unavoidable occurrence, and that there is an appropriate level of unemployment necessary for the smooth functioning of the economy, is among the great, unexamined myths of our time,” declares Tcherneva in this concise polemic. “It is also bad economics.”
The actual nature of the relationship between unemployment and inflation is an unsolved mystery, according to Tcherneva. Moreover, the Fed has no “reliable” theory of inflation — even though the Fed began to claim, starting in 2014, that the U.S. economy was at full employment. (Never mind the 3 to 4 million people who were unemployed and seeking work.)
The assumption that there is an optimal level of unemployment comes with harsh ramifications. Unemployed people are less healthy and suffer higher rates of suicide and mortality. Their lifetime earnings shrink, and they often must be supported by social welfare programs as they try to find to work. Chronic unemployment causes communities to decline and collapse. In macroeconomic terms, unemployment depresses GDP growth — Tcherneva cites an analysis by Australian economist Bill Mitchell, who calculated a decline of nearly US$10 billion in output per day caused by unemployment during the Great Recession in the U.S. (versus output if the “full” employment rate at 2.8 percent per annum average GDP growth of 2003–07 had held).
“What if we changed all that,” asks Tcherneva, “and made it a social and economic objective that no job seeker would be left without (at a minimum) decent living-wage work?” The solution she strongly advocates is a job guarantee: a commitment by the government to provide everyone who wants to work with a job. If a job is not available in the private sector, it will be provided in the public sector...read the rest here
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