Lotus assignment #2
Natural rate of unemployment
(1) When we analyze the
data for 60’s and mid 70’s the Phillips curve is vertical. In this period, it
seems, we have reached the natural rate of unemployment little below 3%. The
rate of unemployment does not fall with the rising inflation, according to the
Phillips curve theory, but stays at around the natural rate of unemployment.
Mid 70’s to early 80’s are marked by a steady level of high inflation. During
the years 1975-1977 the inflation falls with the rising unemployment, just as
the Phillips curve is expected to show. Yet, then it levels out and rises
slowly as the unemployment rate sharply increases to around 8% in 1982. The
80’s then show a nice negative relation between the inflation and the unemployment
rate. At the end of the 80’s an apparent natural rate of inflation is reached,
when the inflation stays constant and immune to the movements of the
unemployment rate. It seems, the governments have realized the destructive
forces of high inflation as opposed to less harm caused by high unemployment.
This can be seen as the inflation rate is kept low in the last decade at all
cost, even at an unemployment rate of nearly 13%.
The sharply rising inflation of the 70’s can be also associated by the collapse
of Bretton Woods agreement and the currency loosing its real value, purchasing
parity, hence inflating. The high unemployment difference during 1974 and 1975
may be caused by the 1st oil shock in 1973, assuming the rigidity of
employment agreements, therefore the effect being delayed. The same sharp rise
in unemployment can be recorded after the 2nd oil shock in 1979.
(2-3) I plotted the
relation between the unemployment and the rate of nominal wage change on Graph
2 and put both curves into Graph 3 for an easier comparison. Natural rate of
unemployment is the rate at which the nominal wage increases will begin to
accelerate, because there will be less competition among workers for work, and
more competition among firms to hire workers at this rate. Since the demand for
labor will be at this point higher than supply, the wages and will begin to
rise.
On Graph 2 we can see a
rapid acceleration in the nominal wage increases in the 60’s to mid 70’s. This
proves the natural rate of unemployment theory. On Graph 3 we can also see the
positive relationship between the inflation and the nominal wage change rate.
The natural rate of unemployment has except for the first period ending in the
mid 70’s not been attained. In the 90’s we can instead observe a "natural
rate of inflation", i.e. a stable inflation rate insensitive to the
changes of the unemployment rate.
Graph 4 shows that the
population has been steadily increasing over the entire period at a slow rate
with the proportion of the working population following the trend. Graph 5
shows that the proportion of the labor force has been falling almost
unnoticeably during the period. First 3 data for LF are missing, therefore I
assumed the same LF for the first 4 years of the period for our purposes.
In Graph 6 I plotted the
data for the total labor force LF and the total employment ET. No data was
available until 1965, so I’m starting the period with this year. A comparison
shows that really the total employment has been falling as a proportion of
labor force, since the number of unemployed and actively seeking employment has
been the highest in the whole period. We can see that according to the
forecasts the ET curve shifts upwards, which is consistent with the forecasts
for the unemployment rate to decrease by the year 2000.
Graph 7 shows the series
for the rate of change of Productivity and the rate of change of hourly wages
in manufacturing. The curves for the two are reciprocal, since lower
productivity implies higher cost of production, therefore higher wages and a
rate increase. The sharpest increase in %dWRAM occurs during the 1st
oil shock. The second increase occurs during the 2nd oil shock, but
is much milder. In the last decade the changes in hourly wages become less
sensitive to the changes in productivity. Actually in the period of 1993 to
1996 they move together. This can be explained by a constantly high
unemployment rate. In such a situation the demand for labor on the market is so
low that it never changes enough to cause a visible change in the rates of
wages.
In Graph 8 the Unit Labor
Cost and the ratio of hourly wages of labor productivity (WRMAN/PDTY) have been
moving together during the entire period. It is a paradox that wages have kept
increasing relative to productivity even at the end of the period when the
country is experiencing high unemployment (low demand for labor). Same can be
said about the Unit Labor Cost. Also the costs have slightly accelerated after
the oil shocks in the 80’s.
Hysteresis (persistence of
high unemployment after an adverse shock) can be observed after the 1st
and even stronger after the 2nd oil shock in Graph 9. It can also be
seen after the 3rd shock, which France experienced after the German
reunification. It had been affected by the shock because it decided to lock in
with the German monetary policy after Germany was least hurt by the 2nd
oil shock. Unemployment rate of France is consistent with the average movements
of the unemployment rate of the rest of the euro countries. Hysteresis effect
occurs because of institutional arrangements and strong national labor unions,
which set work conditions for a certain period of time. Therefore the reaction
of unemployment to the growth or decline in the rest of the economy is rigid
and slow.
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Data for France, years 1960-1997 |
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Population, Total (Between 15 & 64 years old) |
POPW |
28,319,000.0 |
28,552,000.0 |
29,138,000.0 |
29,736,000.0 |
30,071,000.0 |
30,368,000.0 |
30,618,000.0 |
30,840,000.0 |
31,064,000.0 |
31,327,000.0 |
31,631,000.0 |
31,936,000.0 |
32,222,000.0 |
32,503,000.0 |
32,769,000.0 |
32,987,000.0 |
33,214,000.0 |
33,464,000.0 |
33,702,000.0 |
33,963,000.0 |
34,320,000.0 |
34,796,000.0 |
35,285,000.0 |
35,728,000.0 |
36,130,000.0 |
36,405,000.0 |
36,589,000.0 |
36,805,000.0 |
37,027,000.0 |
37,227,000.0 |
37,381,000.0 |
37,503,000.0 |
37,635,000.0 |
37,769,000.0 |
37,889,000.0 |
38,021,000.0 |
38,161,000.0 |
38,302,000.0 |
38,423,544.4 |
38,558,026.8 |
38,692,979.9 |
|
Total Population |
POP |
45,684,000.0 |
46,163,000.0 |
46,998,000.0 |
47,816,000.0 |
48,310,000.0 |
48,758,000.0 |
49,164,000.0 |
49,548,000.0 |
49,916,000.0 |
50,318,000.0 |
50,772,000.0 |
51,251,000.0 |
51,701,000.0 |
52,119,000.0 |
52,461,000.0 |
52,699,000.0 |
52,909,000.0 |
53,145,000.0 |
53,376,000.0 |
53,606,000.0 |
53,880,000.0 |
54,182,000.0 |
54,493,000.0 |
54,772,000.0 |
55,026,000.0 |
55,284,000.0 |
55,547,000.0 |
55,824,000.0 |
56,118,000.0 |
56,423,000.0 |
56,735,000.0 |
57,055,000.0 |
57,374,000.0 |
57,654,000.0 |
57,900,000.0 |
58,143,000.0 |
58,380,000.0 |
58,608,000.0 |
0.0 |
0.0 |
0.0 |
|
Inflation |
%dPGDP |
|
3.4% |
4.7% |
6.4% |
4.1% |
2.7% |
2.9% |
3.2% |
4.3% |
6.6% |
5.6% |
6.3% |
7.0% |
8.5% |
11.8% |
13.0% |
11.1% |
9.3% |
10.1% |
10.1% |
11.4% |
11.4% |
11.7% |
9.7% |
7.5% |
5.8% |
5.2% |
3.0% |
2.8% |
3.0% |
3.1% |
3.3% |
2.1% |
2.5% |
1.5% |
1.6% |
1.2% |
0.9% |
0.7% |
1.0% |
1.3% |
|
Wage Inflation |
%dWRMAN |
|
- |
- |
- |
- |
- |
- |
- |
- |
- |
- |
12.5% |
10.5% |
14.5% |
19.0% |
18.8% |
15.2% |
12.1% |
13.5% |
13.2% |
15.7% |
15.1% |
15.6% |
10.1% |
8.3% |
7.2% |
5.1% |
3.4% |
3.8% |
5.0% |
4.9% |
5.3% |
4.7% |
4.0% |
3.7% |
1.6% |
2.6% |
3.2% |
2.3% |
2.2% |
2.3% |
|
Percent change Unit Labor Cost |
%dULC |
|
- |
- |
- |
4.8% |
2.9% |
2.5% |
3.0% |
7.3% |
6.9% |
7.1% |
7.6% |
6.9% |
9.1% |
16.1% |
18.4% |
11.6% |
10.2% |
9.6% |
9.8% |
13.7% |
12.5% |
11.8% |
9.1% |
5.9% |
4.4% |
2.4% |
2.0% |
1.0% |
2.0% |
4.0% |
4.0% |
2.6% |
3.4% |
-0.4% |
2.0% |
1.8% |
0.4% |
0.6% |
1.3% |
1.2% |
|
Percent change Productivity |
%dPDTY |
|
- |
- |
- |
- |
- |
4.4% |
4.5% |
4.0% |
5.4% |
4.5% |
4.2% |
3.6% |
4.0% |
2.8% |
0.0% |
3.4% |
2.3% |
2.9% |
3.0% |
1.5% |
1.7% |
2.1% |
0.9% |
2.3% |
2.0% |
2.0% |
1.8% |
3.4% |
2.7% |
1.7% |
0.8% |
1.8% |
-0.1% |
2.7% |
1.2% |
1.5% |
2.0% |
1.9% |
1.1% |
1.3% |
|
WRMAN/PDTY |
|
- |
- |
- |
- |
- |
0.00 |
0.00 |
0.00 |
0.00 |
0.00 |
0.42 |
0.45 |
0.48 |
0.53 |
0.62 |
0.73 |
0.82 |
0.89 |
0.99 |
1.08 |
1.24 |
1.40 |
1.58 |
1.73 |
1.83 |
1.92 |
1.98 |
2.01 |
2.02 |
2.07 |
2.13 |
2.23 |
2.29 |
2.38 |
2.41 |
2.41 |
2.44 |
2.47 |
2.48 |
2.51 |
2.53 |