Class Conflict and the "Natural Rate of Unemployment"

Challenge, Nov, 1999 by Robert Pollin

But what happened to Friedman's basic insight as NAIRU literature developed? Much of the literature around NAIRU has been focused on establishing a set unemployment rate at which inflation reliably accelerates. The history of the past thirty years, in the United States and elsewhere, has demonstrated irrefutably that this is a futile exercise. But this does not mean that there is no relationship between inflation and workers' gaining in terms of employment and higher wages.

This becomes clear when considering some of the main findings, for example, in the winter 1997 Journal of Economic Perspectives symposium on NAIRU, a leading reference on this topic. Robert Gordon's paper in this symposium summarizes the extensive econometric evidence he has assembled over the past two decades, on the basis of which he concludes that a "time-varying" NAIRU exists. For example, according to Gordon, NAIRU fell from 6.2 percent in 1990 to 5.6 percent by mid-1996.

Also summarizing extensive econometric research, Douglas Staiger, James Stock, and Mark Watson, like Gordon, conclude that NAIRU does exist but is subject to wide variations. They find that, as a point estimate, NAIRU in 1997 was between 5.5 and 5.9 percent, which was a full percentage point below its level for the early 1980s. They also find that "the most striking feature of these estimates is their lack of precision." Indeed, for their 1997 point estimate of 5.5--5.9 percent, the 95 percent confidence interval ranges between 4.3 and 7.3 percent. So their NAIRU estimate not only varies over time but also has the capacity to range widely at a given point in time.

The general thrust of these broad econometric findings appears solid. Indeed, it is difficult to dispute them precisely because they are so broad. But focusing exclusively on point estimates, confidence intervals, and their variation over time misses a fundamental question jumping out at us from these results. That is, what makes the "time-varying" NAIRU vary in the first place? It is remarkable that leading economists who have devoted so much time to estimating values for NAIRU almost completely neglect this question. Nevertheless, a few hints are dropped as asides. Gordon, for example, writes,

The two especially large changes in the NAIRU ... are the increase between the early and late 1960s and the decrease in the 1990s. The late 1960s were a time of labor militancy, relatively strong unions, a relatively high minimum wage and a marked increase in labor's share in national income. The 1990s have been a time of labor peace, relatively weak unions, a relatively low minimum wage and a slight decline in labor's income share. (1997, p. 30)

Gordon also cites the role of increased global competition in product and labor markets and the increase of unskilled immigrant labor as contributing to the declining NAIRU in the United States. Though again these observations are mere asides in Gordon's paper, the overall point is clear: that changes in the relative power of capitalists and workers, and the related increase in the extent to which the U.S. economy has become integrated into the global economy, are the major factors that have forced NAIRU to fall.