NAIRU, Unemployment and Post Keynesian Economics

NAIRU, Unemployment and Post Keynesian Economics

The purpose of this paper is to present the disadvantages from the use of NAIRU as the key instrument of monetary-policy making to restrain the upward tendency of unemployment.

Authors: Bozani Vasiliki
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Stemming from developments in mainstream macroeconomic theory after the collapse of neoclassical-Keynesian synthesis, the concept of Non-Accelerating Inflation Rate of Unemployment (NAIRU hereafter) has been the key instrument of monetary-policy making. By means of inverse relation between inflation and growth levels, policymakers simplify their targets by setting inflation as the overriding objective of monetary policy and addressing unemployment by focusing on flexibility issues to clear the labour market so as to establish a non-inflationary long run equilibrium level of unemployment (e.g. Layard et al., 1991; Ball and Mankiw, 2002). In this manner, the concentration on inflation targeting is thought to be the most appropriate way for expanding economic activity (Fischer, 1993; Romer and Romer, 1999; Easterly and Fischer, 2001). The treatment of unemployment as a structural factor within inflation targeting regime however, allows its positive consequences on economic activity to be realized only in theoretical grounds (Jekinson, 1987; Sawyer, 1987, 1998; Arestis and Sawyer, 2006).

Thus, the widespread adoption of NAIRU framework among economists and the unexpected consequences of its implied policies seem to be the main reason for which mainstream economists are incapable of pushing economies away from continuous recessions and unemployment expansions. In these grounds, the presence of any unemployment can be faced by changes in labour market policies and institutions; some of these are represented by softening minimum wage restrictions, taxes on labour and restrictions on hiring and discriminatory or other impediments to hire either by reducing or eliminating unemployment benefits by upgrading education and training of workers and perhaps by offering subsidies to new hiring that will be examined below (e.g Layard et al. 1991; Baker et al., 2004; Glyn et al., 2004). All these theoretical suggestions are opposed to what actually happens, since in practice labour market policies set an unfriendly environment for workers regardless of whether there is an unemployment protection system or not. At this basis, Post Keynesian economists make a step beyond, question the assumptions upon which NAIRU concept is based and introduce a more realistic approach. Besides, in their view the only effective way for cutting unemployment down is the adoption of traditional Keynesian policies (e.g. Sarantis, 1993; Arestis and Sawyer, 2003; Arestis et al., 2007; Stockhammer; 2004a, b, 2007).

In these grounds and given the new Keynesian criticism about the NAIRU framework, by setting the magnitude of unemployment at the centre of our analysis the main concern of this paper is: firstly, to document the adverse effects of the currently adopted supply side framework on unemployment issues; secondly to signify the correctness of demand side approach and outline the fundamental ideas, arguments and propositions, which have been developed within the Post Keynesian tradition and refer to the acceleration of economic activity. 

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