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Well, Yes, That’s Why Unemployment Is At 3.5%

If only a smattering of economics had managed to stick:

But this is neither a normal president nor a normal economic boom. For starters, though wage growth is finally ticking upward, ordinary workers have nothing like the bargaining power they used to enjoy in an economy with unemployment as low as 3.5 percent.

This is true. This is also the point.

Think on the Federal Reserve and their dual mandate. The task is to keep inflation at about – either side of – 2% and to have full employment. The usual definition of full employment here being the tautologous, in this detail, rate of unemployment that doesn’t push inflation over that roughly 2%.

OK. And the normal American recession – that is, most post-WWII ones except the last – have been created by the Fed. Inflation looks like going above the 2%, or has been at it for some time even, so they raise interest rates to engineer a recession. This increase unemployment and brings inflation back down again.

This is the Philips Curve, there’s a trade off between inflation and unemployment. The Philips Curve which lots of people say isn’t operative these days.

But, of course, it is. What changes is the structure of the underlying labour market. How much power do unions have, that’s one example of that structure. How geographically mobile is the workforce? This is one reason why the US has always had a more fluid market than Europe. Even, do unemployment benefits last forever or only 6 months – another reason for greater American fluidity. The greater that fluidity, the more flexible the labour market is, then the lower the unemployment rate at which that inflation starts to appear. Therefore, the more labour market flexibility we’ve got the lower we can push the unemployment rate before we engineer a recession to kill off inflation.

We think that this is good too. We think that it’s better that all those who want to work can. Better, fer sure, than having people rotting in unemployment just to make sure Granny’s savings don’t disappear. So, we’re in favour of flexible labour markets so that there’s less unemployment.

Sure, such flexibility means that in the good times – now – labour has less power than it used to. But that’s the trade off we get in order to be able to have 3 and 4% unemployment with no inflation.

Labour having lower bargaining power isn’t an error here, it’s the point.

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4 years ago

Yes, every time someone claims “the Philips Curve has been disproven” (meaning that there are no longer trade-offs), what really happened is something independent that shifts the equilibrium. The Trump Tax Cut restored the rewards to expansion and risk-taking, increasing the overall economy (though tariffs impeded it and made the future riskier), and a recent decision to demand that the able-bodied and childless at least look for work before recharging their EBT cards will increase it further. Numerous impediments on border-jumping to seek work (now finally getting through the courts!) will modify the “constants” again.

4 years ago

Can I say another thing about the “dual mandate”? It’s to defend the value of the dollar (by raising interest rates to fight inflation) and “full employment” (by watering down the dollar until there are enough to throw at every job-seeker). Yes, incompatible and in conflict. But provide enough “mandates” and there’s cover for a bureaucracy to justify any decision it cares to make on a whim.

4 years ago


If unemployment is low there is a smaller pool of replacements for each job

Thus, each employed person has stronger bargaining power for an increased benefits package

Am I missing something?

Nautical Nick
Nautical Nick
4 years ago

Granny savings shouldn’t be invested in deposit funds anyway. I’m more concerned about someone rotting in unemployment just because a union can divert money into the pocket of a union member at his/her expense.

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