Economics is full of jargon. This is not unique to economics but even more so than in most professions the jargon is used to conceal information: sneaking dubious assumptions about the world past casual audiences, packaged in abstract-sounding terminology.
In this post I introduce one such term: NAIRU, or Non-Accelerating Inflation Rate of Unemployment. If your eyes glazed over reading that, it’s by design. Please read on because this impressively abstract acronym has been, and continues to be used to inflict economic misery on millions upon millions of people. In my opinion it is used as a justification to deprive people of a fundamental human right: the right to work.
Bad enough if adherence to NAIRU were a utilitarian decision society has to make in order to remain financially stable, sacrificing some for the well-being of most. Worse yet if the theory behind NAIRU is actually wrong, as it almost certainly is. And even if there is some truth to it, there is a better way to provide price stability for the economy but that will be the topic of a future post.
In this post I’ll talk about the actual causes of unemployment, and the cost to individuals and society. The purpose of this post is to show that involuntary unemployment is a creation of the government, and only the government can solve it.
What is NAIRU?
NAIRU is often referred to as the “natural rate” of unemployment, which was actually a previous theory that NAIRU sought to improve on. NAIRU refers to the rate of “acceptable” unemployment, under which inflation would inevitably increase at an accelerating rate.
According to the theory, once unemployment rate falls below NAIRU, employees have too much power to bargain for higher wages, as employers can’t simply threaten to fire them and hire a replacement from the pool of unemployed people. The increased cost of labor pushes up the general price of goods and services, resulting in cost-push inflation. Higher income for workers then increases aggregate demand, bidding up the prices further (known as demand-pull inflation, because aggregate demand is pulling up the general price level).
I am not equipped to argue how sound the NAIRU concept is — suffice to say here that many economists reject it, but it is considered such economic orthodoxy that it is accepted without a question by mainstream economists and those they advice. Since my focus is Canada and the US, both the Bank of Canada and the Federal Reserve use NAIRU to target their monetary policy. Both define Full Employment as being equal to NAIRU which as I will show below makes a mockery of the idea of full employment.
- Working age population: 29.3 million
- Labor force participants: 19.3 million
- Unemployment rate: 6.9%
- Unemployed people: 1.3 million
- Estimated NAIRU: 6.4%
- People left unemployed at “full employment” under NAIRU: 1.2 million
- Difference between current unemployment and “full employment”: 96,000 people
- Working age population: 204 million
- Labor force participants: 158.9 million
- Unemployment rate: 4.9%
- Unemployed people: 7.8 million
- Estimated NAIRU: 4.8%
- People left unemployed at “full employment” under NAIRU: 7.6 million
- Difference between current unemployment and “full employment”: 188,000 people
Looking at those numbers, keep in mind the following: long-term unemployed who have been discouraged from even looking for work are not included in the unemployment rate as they’ve dropped out of the labor force. It also doesn’t distinguish between fully employed people and underemployed part-time workers. This is how the US employment stats look good on paper, until you realize labor force participation has dropped and most new jobs are part-time minimum wage jobs. Nothing to brag about, Obama.
You’ll also note that most unemployed people would remain so even if the unemployment rate reached NAIRU. Even as policy makers in Ottawa or Washington celebrated “full employment”, 1.2 million Canadians and 7.6 million Americans would remain involuntarily unemployed. These are not people who are unemployed for any fault of their own, there are simply not enough jobs in the economy for them to take, and that is because government action.
Economists sometimes refer to this cohort as the “Reserve Army of Unemployed“, because they act as a buffer stock against inflation. I like the metaphor, so let’s take it further:
US Armed Forces have about 2.1 million active and reserve personnel, so the US Reserve Army of Unemployed is roughly 3.6 times larger.
Canadian Armed Forces have some 119,000 personnel, making the Reserve of Unemployed just about 10 times larger.
No one asked to serve in the Armies of The Unemployed, even though they are supposedly doing the critical task of stabilizing the value of national currencies.
Nor are the involuntarily unemployed compensated for the toll this takes on them financially, socially, mentally, and physically. Where they are compensated, there are lots of strings attached; and they are stigmatized, blamed and humiliated at every turn. No one receives a Purple Heart for being a casualty of unemployment that is built into the system — unemployment without which the system believes it couldn’t operate.
Costs of Unemployment
Putting aside whether NAIRU is true or not; or if there might be an alternate, better and more humane way to stabilize the value currency (spoiler alert: there is), let’s talk about the what adherence to NAIRU costs to the society, the economy, and individuals.
Bill Mitchell has estimated that in 2011 the US was missing out on $US6 billion to $US9.7 billion of national income (real GDP) daily, as compared to pre-2008 financial crisis levels of employment. That’s $2.2 trillion to $3.5 trillion over the course of a year lost in economic output alone. As a comparison, by 2015 the US had spent some $4.4 trillion in wars in Iraq, Afghanistan and Pakistan; or $314 billion per year (not taxpayer-funded, despite what you may have heard on occasion).
Those figures of loss of potential output don’t account for skill loss. The private sector generally considers anyone who has been unemployed for more than six months as unemployable, which leads to an understandable drop in motivation and further depreciation of marketable and productive skills.
On a societal level, it’s easy to shrug off the costs of unemployment: just blame it on structural unemployment, automation, taxes and over-regulation, minimum wages, unions, and the unemployed themselves. Turns out, government is almost entirely to blame, but perhaps not for the reasons most people think. More on that later.
On a personal level, however, the costs are devastating. Loss of income leads to a loss of financial freedom, safety, and autonomy; if one ever even had those. It affects levels of stress, impairs sleep, can trigger depression and its resulting downward spiral that in turn can create a cascading series of effects: loss of motivation, anger, hopelessness, substance abuse, or other self-destructive behavior, alienation from the rest of society, stressed, fractured, or abusive relationships with family and friends. Involuntary unemployment can cause or exacerbate a number of mental or physical conditions, and the effects can be multi-generational.
Is it any wonder, then, that after Thatcher and Reagan adopted free-market policies, suicide rates go up under Conservative governments?
Of course, the poor also cannot afford decent nutrition, or even housing: even the most basic of needs, sometimes even if they are employed. While there’s talk of raising retirement ages because the average life expectancy is creeping up, this is not the case for the poor and the marginalized.
Speaking of marginalized people; unemployment falls heavily on the shoulders of racial minorities, especially black people; on LGBT people, especially transgender people. It’s easy to legislate non-discrimination clauses into employment and call it a day, but this does little to counter actual bigotry or unconscious biases — just come up with any other reason to fire or not hire someone and give that as the reason.
Now that previously well-off people, mainly working class white people, are suffering job loss or under-employment at increasing rates we’re seeing an all too predictable shift in politics, and people like Donald Trump are benefiting by adopting right-wing, populist, reactionary politics. White supremacists, militia members, and actual neo-Nazis are proudly coming out of the woodworks because they feel empowered and enough people are willing to listen to them on who they should actually blame for their hardships.
The media, of course, following their “both sides do it”-doctrine tries to dig out examples of similar behavior on the left, but Bernie Sanders and Jeremy Corbyn and their supporters are a far cry from the right-wing hate machinery that’s propelling Trump and his ilk elsewhere.
Aside from potential violence from political radicalization, what about crime that arises from need or lack of opportunity? What would it do to crime rates (that have been steadily decreasing over time, despite frantic fear-mongering from tough-on-crime politicians) if everyone who wanted or needed a job could get a full-time job at a living wage, even former felons?
Clearly involuntary unemployment is a societal responsibility to fix, a public good, and so cannot be left in the fickle hands of the private sector to fix. Simply giving adequate unemployment benefits or other compensation, or even instituting a Guaranteed Basic Income, helps in alleviating the worst effects of unemployment and poverty. But income alone, even if unconditional, won’t help fix the problem of involuntary unemployment. Many unemployed people would choose a job over free money, for all the other perks they’d get from being a fully-participating member of society. And it doesn’t need to be either-or.
What Can Government Do And How Is It Responsible?
I understand common objections, especially from conservative ideologues: “Government can’t create wealth! Only the private sector can create jobs!”
Both are obviously absurd claims. Government spending is private sector wealth, this is not an opinion but an accounting fact. The existence of police, firefighters, armed forces, teachers, and other government employees refute the second point pretty empirically.
They’re not describing what is, but what (according to them) ought to be. They define and value a job as something that the employee does that makes the employer more money than what they put in (as in, what they pay back in wages and material costs). This definition of work is, of course, inherently exploitative as the worker is paid less than what their labor is actually worth.
Outside of cooperative structures, this is what work in for-profit sector is about, and most people are fine with that so long as they feel fairly compensated and at least see their wages rise with productivity (which we all know has not happened). I don’t think there’s necessarily anything wrong with that kind of work.
It’s easy to quantify for-profit work. It can all be reduced to a simple “dollars in, dollars out” calculation, but focusing on this at a societal level leads to a fixation on output and efficiency. Mainstream economics and people who claim governments should be “run like businesses” suffer from this fixation, and it’s bled over to how we even think about work.
But it’s not the only kind of work. There’s also work that has primarily social value: work that benefits the society or community, not to make money for a third party. It’s the only kind of work there was until money came alone, and money is a creature of the government. There was little need to fish, hunt or gather more food than what was needed to sustain your community, and that could be preserved for winters and emergencies. Resources were pooled and distributed equitably in earlier cultures, and there is no evidence that an internal barter economy has ever existed in human cultures. Surpluses could be traded with outsiders, but to benefit all of the community.
Only when power was taken by or ceded to what can be called a ‘government’; be it a chieftain, warlord, king, emperor, senate, or federal government; does money enter the picture as means of provisioning the government.
All of a sudden, people owe taxes to the government. At that moment everyone is unemployed as no one’s getting paid for their labor. So the government issues money (perhaps in the form of tally sticks) — in exchange for goods and services — that people can then use to settle their taxes to the government.
Now we have an economy. There’s money: a unit of account, that can be used to establish credit, settle debts, and assess value of goods and services. There’s demand for the money itself as it has to be redeemed to pay taxes (hence: money is a tax credit) and avoid the punishment that would follow if one were to defy the government and not pay them.
The government can now simply pay for the goods and services it requires, instead of having to seize them by force. This is still coercive, but most people agree that taxes are the price we pay for our societies.
From this simplified but fairly universal account we see that taxes create unemployment, even in a modern economy. They also give value to a currency without which markets just can’t operate, and so give rise to private sector economy. Taxes create the need for paid work in the first place, and so a just society should ensure that everyone who wants a job can get one.
Conclusion: Forced Unemployment Is a Human Rights Issue
Which is why I’ll make the following argument: Adherence to the NAIRU concept ensures a significant portion of people who want to work remain involuntarily unemployed. This amounts to forced unemployment.
The Universal Declaration of Human Rights, Article 23 states:
“Everyone has the right to work, to free choice of employment, to just and favourable conditions of work and to protection against unemployment.”
In my opinion, this leaves most countries in violation of Article 23. Governments create unemployment — it’s time we demand it steps in where private sector will not. It’s good to incentivize the private sector to create as many jobs as possible, but it’s not enough.
My next post will introduce the solution, the Job Guarantee, aka. the Employer of Last Resort, and why it is superior to the NAIRU as means of stabilizing the value of money.