Fellow Shortrunners,
One of the major indicators of the success of a country's economy and usually of the incumbent political party is a measure of the unemployment rate. There are two sides to the coin, which the Federal Reserve does its best to balance. Employing as many people as possible is a good social goal to have. On the other hand, when too many people are employed, it becomes difficult for companies to find new workers. Not only that, but workers begin to demand higher wages, and this can result in inflation. The question then becomes what level of employment should a country aim to achieve.
The concept of a natural rate of unemployment (the level just before it becomes inflationary) is often called the NAIRU. The NAIRU (non-accelerating inflation rate of unemployment) is an abstraction that is useful to both central bankers and politicians. The problem that is often misunderstood is that it changes over time. Estimates of the NAIRU at the start of the 1990's were around 6%. Today they range from 3.5 to 4.5%.1 The NAIRU in fact is dependent upon several different factors which I will discuss here.
There is no doubt that increases in the minimum wage increases unemployment. In fact, they increase the natural level of unemployment by making labor more expensive to hire. Unions have the same effect. While workers can unionize to try to get better working conditions and benefits, these unions have the effect of costing the workers more jobs. In Europe, where social benefits are extreme compared to the US, the level of unemployment for countries like France, Germany, and Italy is about twice what it is in the US. These differences are the result of things like unions and wage laws, which economists call structural differences. These structural differences change the amount of people that can work in the economy without the price level becoming affected.
There are plenty of outside factors that affect the NAIRU. For instance, things like supply shocks can cause short run changes to the level. For those with a little more economic background, some estimates of the NAIRU are derived from the Phillips Curve (a graph of inflation and unemployment). Unfortunately, the Phillips Curve has been relatively unsuccessful in recent years at predicting a tradeoff between inflation and unemployment. This is really what has sparked the interest at understanding what the NAIRU really should be.
Those who have taken an introductory economics course have learned that there are different types of unemployment: structural, cyclical, and frictional unemployment (if you are confused by this, further reading on these types of unemployment can be found in the classroom section of theshortrun.com). What many people don't know is that one of the components of frictional unemployment is something called search unemployment. This search unemployment is really a measure of those people without jobs, with their reason for not having a job being that they have not yet found a job that matches their skills with an employers needs. In other words, the longer it takes for a financial analysis to find a financial firm needing his or her services, the larger the level of search unemployment. In my mind, with the advent of services like monster.com and hotjobs.com, the amount of time it takes to match skills with jobs has decreased. This could be one possible explanation for at least a portion of the decrease in the US NAIRU over the past few years.
I hope everyone had a great break, and I am sorry about running a little long on my newsletter, but there really wasn't a great deal of new data released due to the holiday and I felt a need to compensate.
Sincerely,
Daniel Hicks
Economic Releases
The data section provides charts and data for the most important economic indicators. This week is a little light on the releases because of the Thanksgiving holiday.
Trade Balance: $ -34.26 billion
- The trade deficit for September worsened to a new record level of $34.26 billion. This increase certainly is a sign of strong demand in the US. It may be the result of the start of the holidays and preparation for the large shopping season that really began on Friday.
Budget: $ -11.3 billion
- During the month of October, the Federal Government recorded a Treasury deficit of $11.3 billion. October represents the first month of fiscal year 2001. The Department of the Treasury is forecasting the government to run a surplus of $228 billion this year. This surplus should help to make up some of the lack of savings generated by the high level of consumption in the US.
Jobless Claims: 336,000
- Initial Jobless Claims rose to 336,000. Over the past few weeks, jobless claims has been increasing. These increases are a good sign that the economy is slowing and hopefully this will become evident in a less tight labor market. At this level there is still more worry of the labor market becoming inflationary than of the economy slipping into a recession, and this slow increase in Jobless Claims appears to be consistent with the Fed's current goal of a soft landing.
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Fed Watch
The Shortrun Fed Watch section contains the most recent beige books as well as speeches by Fed Governors with a brief description of each speech and in some cases a Shortrunner's opinion on its significance.
Curious as to the records of our Fed watchers? Visit the Fed Watch opinions on monetary policy section to see whose predictions have been on target.
Articles / Book Reviews
Newest Articles:
Has
the information age really improved living standards?
- by Alex Rothenberg
Fledgling
Euro Wrestles to Consolidate the Different Labor and Political
Environments Across Nations
- by Alex Rothenberg
Newest Book Reviews:
The
Great Crash 1929
- reviewed by Kelly Bryan
The
Good Society
- reviewed by Daniel Hicks
Site News
Interested in being a contributor to the short run? Show off your economic knowledge and breadth of learning by reviewing an economic text. Simply visit the short run's reviews section and submit your own review. If accepted, we will publish it on the website and post links to it both on the front page and in the newsletter.
Source:
1. The Concept, Policy Use and Measurement of Structural Unemployment:
Estimating a Time Varying NAIRU across 21 OECD Countries - Economics
Department Working Papers # 250. ~ Pete Richardson, Laurence Boone,
Claude Giorno, Mara Meacci, David Rae, David Turner
If you would like to unsubscribe, simply reply with the word unsubscribe in the subject line. - DLH
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Issue #27
Volume #1
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