Saturday, August 23, 2014

Is There A Natural Rate Of Unemployment?

Economists assume that there is a natural rate of unemployment.  It is the rate at which lowering the rate would increase inflation.  This article ridicules that idea.  It argues that unemployment is man made.  That is, institutional and government policies create unemployment.  It also attacks the concept of labor market flexibility.  Implicit in that idea is the notion that markets would clear, and unemployment would fall,  if labor markets were more flexible.  That is, labor should be free to move to where the demand for labor was unsatisfied. However, flexibility in many cases is not desirable.  For example,  computer generated scheduling of work hours is good for employers, but it creates hardships for workers.  They are forced to adjust their schedules to adapt to the irregularity of demand. Businesses also benefit from policies which do not restrict layoffs by employers.  What's good for business owners is not always good for employees.  Flexibility should be two sided.

Labor policies in Germany provide a good example of the benefits from cooperative labor market flexibility.  Agreements between management and labor unions have allowed firms to adapt the number of hours worked to changes in demand.  Labor and management both benefit from reductions in hours worked per employee instead of layoffs.  The unemployment rate is not necessarily "natural" it often determined by institutional and government policy.

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