Should we be pleased to have a tight labour market?
Posted August 10, 2007on:
Over at no right turn, they seem to believe that economists sour reaction to the low unemployment figure is ridiculous. After all, a low unemployment rate implies that people have jobs, and a secure income, which is of course valuable to society.
They seem to believe that if we accept a little more inflation we can keep this low level of unemployment, and society will be better off. However, in this doesn’t hold. As an economist would say, in the long-run there is no trade-off between inflation and unemployment. If we accept higher inflation now, then in the future unemployment will rise to its natural rate, and we will be stuck with a higher rate of inflation. The unemployment level is a problem now because it is lower than the NAIRU implying that the upward pressure on wages is too strong, and as a result the price level will increase.
Now government policy should be focused on decreasing the natural rate of unemployment. If the government can help improve the function of the market, they can make sure that in the long-run, unemployment will be lower. One of the things the government can do to make sure the market functions better, is keep price growth low, so that firms and buyers are more certain of the price level, and savers (whose money gets invested into firms) have more incentive to say (and so there is more investment). So who knows, maybe there is a long-run relationship between inflation and unemployment, lower inflation leading to less unemployment!