Robert Pollin, The “Natural Rate” of Unemployment. Dollars & Sense, Sept/Oct 1998.
Orthodox economists claim there is a link between unemployment and inflation. If the unemployment rate drops too low (say, below 6%) inflation will rise. [That is because they believe inflation is caused by purchasing power, and lower unemployment rates mean that more people have money to spend.]
Milton Friedman concocted this theory in 1968, and called it the “natural rate of unemployment.”
Other economists adjusted the theory slightly and called it the “Non-Accelerating Inflation Rate of Unemployment,” or NAIRU—i.e., the rate of unemployment that does not cause inflation to accelerate.
The theory has run into some trouble. In the U.S., the unemployment rate during the 1990s was below 6%, but the inflation rate stayed remarkably low. Nevertheless, Democrats in the U.S., Labour in the U.K., and Social Democrats throughout Europe remain “committed to the idea of fiscal and monetary stringency” in order to control inflation (66). Western European countries do have much higher rates of unemployment than the U.S., but the U.S. case proves that the theory is wrong.
Friedman himself said there was nothing “natural” about the natural rate of unemployment. It would vary according to the power of the working class “to organize unions and establish a livable minimum wage.” (67)
Pollin compares the theories of Robert Gordon, Karl Marx and Michal Kalecki.
Kalecki argued that full employment could actually benefit capitalists.
Although capitalists would get a smaller share of the total pie, the pie would be so much bigger that they would actually be richer because workers would be so much more productive than when a portion of the working class was idled by unemployment.
The problem, according to Kalecki, is that capitalists would lose control over the workplace and perhaps even the state.
That threat might be handled by adopting “fascist social and political institutions” which would use the state’s brute force to quell working class political aspirations. (67)
“In the Friedmanite view mass unemployment results when workers demand more than they deserve, while for Marx and Kalecki, capitalists use the weapon of unemployment to prevent workers from getting their just due.” (67)
1. Workers don’t cause inflation because they don’t have the power to raise prices. Only capitalists can do that. So there is no automatic relationship between low unemployment rates and high rates of inflation.
2. Workers’ incomes fell through most of the 1990s [in fact, from 1973 to 1997] even though the unemployment rate was the lowest it had been since 1973.
3. Full employment is not a measure of workers’ well-being. If wages remain low, they are no better off because they have jobs.
4. “In our current low unemployment economy, should workers … succeed in winning higher wages and better benefits…” we should expect that “the business community will welcome a Federal Reserve policy that would slow the economy and raise the unemployment rate.” (68)
And that has happened! The unemployment rate has risen to over 6% (6.2% in July 2003).
See the next two articles: “The Higher Minimum Wage Works” and “Fallen Wages Inch Up.”
Current Min wage (2002): $5.15. Proposed: $6.65. Note: these trends have already reversed.