Mr Darling, the master of contortion 31/10/08
Steve Richards highlights the lack of economic philosophy within New Labour, examining why this is the case and its effects on parliamentary strategy. [Independent]
Smith orders inquiry into MI5 and CIA torture claims 31/10/08
“Jacqui Smith, the home secretary, has asked the attorney general to investigate possible "criminal wrongdoing" by the MI5 and the CIA over its treatment of a British resident held in Guantánamo Bay, it was revealed tonight.
The dramatic development over allegations of collusion in torture and inhuman treatment follows a high court judgment which found that an MI5 officer participated in the unlawful interrogation of Binyam Mohamed. The MI5 officer interrogated Mohamed while he was being held in Pakistan in 2002.” [Guardian]
Straw asked to pardon executed witches 31/10/08
“A petition calling for the posthumous pardon of women and men who were executed as witches in Britain will be presented to the justice secretary, Jack Straw, today.
Campaigners hope evidence of eight grave "miscarriages of justice" will persuade him to take action.” [Guardian]
BBC battles to calm prank storm 31/10/08
"The BBC attempted last night to draw the poison from another calamitous week by taking the unprecedented step of banning its highest paid star for three months, and accepting the resignation of one of its most senior and best-loved executives." [Guardian]
Click here to read more information on Mr Grimsdale, King Heron and Mobius
Showing posts with label keynes. Show all posts
Showing posts with label keynes. Show all posts
10/31/08
10/27/08
Heron's Eye 27/10/08
Government must be bold to deal with recession
MP John McFall lays out a possible solution to ensure an equitable injection into the economy. [Guardian]
Borrowing more is responsible, says Gordon Brown
“Gordon Brown insisted today that increasing borrowing to shore up the economy was the "responsible" thing to do.” [Guardian] [Guardian]
MP's anger as state bears cost of any Sellafield disaster
“Taxpayers have been left with unlimited liability amounting to billions of pounds should there be a repeat of a nuclear accident at Sellafield under a deal signed with a US-led consortium which takes over the decommissioning of the waste facility from November 24. The indemnity even covers accidents and leaks that are the consortium's fault.” [Guardian]
Woolas dropped from TV panel after gaffes
“Immigration minister Phil Woolas has been axed by the government from a high-profile television appearance, days after making a series of gaffes. Woolas, who controversially called for population curbs and predicted the disestablishment of the Church of England, had been due to appear on tonight's Question Time on BBC1. A Home Office spokesman confirmed the change of plan but insisted the decision had been taken on the basis of the most topical subject matter.” [Guardian]
Click here to read more information on Mr Grimsdale, King Heron and Mobius
10/21/08
Heron's Eye: 21/10/08
Three men in a boat (to say nothing of the media mogul)
Michael White examines the rumours behind the allegations that Peter Mandelson and George Osbourne have been courting the Russian aluminium tycoon Oleg Deripaska, politely widening the net of intrigue in the world of schmoozing to discuss Rupert Murdoch. [Guardian]
Seven things you might not know about Gordon Brown's reshuffle
Andrew Sparrow provides interesting observations on Gordon Brown’s recent cabinet reshuffle. [Guardian]
Two key Blairites say government could have done more to avert financial crisis 21/10/08
Andrew Sparrow shines light on evaluations from key Blairites on how (and how well) the Government has effected the financial crisis. [Guardian]
Amid the rubble of global finance, a blueprint for Bretton Woods II 21/10/08
Jeffrey Sachs on the need for a Bretton Woods II and how it should look beyond financial regulation and address world development goals and environmental issues. [Guardian]
Wasteful job creation schemes 21/10/08
The Guardian letters page, providing differing interpretations on the benefits of full employment. [Guardian]
10/20/08
Heron's Eye: 20/10/08
Labour fails to win poll boost from banking crisis 20/10/08
Gordon Brown is winning praise but not votes for his handling of the financial crisis, according to a Guardian/ICM poll published today. It shows the Conservatives maintaining a double-digit lead, enough for a Commons majority, despite the transformation of the prime minister's reputation at Westminster. [Guardian]
Gordon Brown defends level of national debt 20/10/08
Gordon Brown today defended the level of Britain's national debt – claiming it is "considerably lower" than a decade ago. The prime minister told MPs that it was because the government had repaid so much of its debt in previous years that it was able to borrow more now. [Guardian]
Financial crisis leaves David Cameron with few options 20/10/08
Last week, in an article about what David Cameron and his circle were thinking about the political consequences of the global financial crisis, ConservativeHome reported: "The Tories are not worried about being largely out of the news." [Guardian]
David Cameron is back - but he's storing up trouble for himself with this speech 20/10/08
“Is David Cameron at liberty to attack Gordon Brown's economic record as chancellor and prime minister? Of course he is. That's what we pay an opposition for: to oppose. He also produced a joke I hadn't heard.
Yet to hear some of this morning's talk about breaking the "political truce" during a financial crisis, you'd think he'd done something terrible like push the Brown kids off their tricycles and grazed their tiny knees.” [Guardian]
Salmond blames 'sub-prime minister' for banking disaster 20/10/08
Alex Salmond yesterday blamed Gordon Brown for the economic "calamity" that has forced the government to find £200bn to bail out the UK's banking sector.
The Scottish National party leader accused Brown of "presiding over the biggest economic reverse for a generation", deriding him as the "sub-prime minister". [Guardian]
'Insolvency arc' may influence Scottish poll 20/10/08
Michael White on the effects of the current financial crisis on the SNP’s political fortunes. [Guardian]
Darling invokes Keynes as he eases spending rules to fight recession 20/10/08
The Treasury confirmed yesterday it intends to fast-track spending planned for future years as Alistair Darling signalled that he will use next month's pre-budget report to relax Labour's long-standing fiscal rules to head off the worst effects of the recession.
Over the weekend the chancellor indicated that the government would seek to reflate the economy with a period of targeted spending on large infrastructure projects. Darling said yesterday that the economic thinking of legendary economist John Maynard Keynes was coming back into vogue. [Guardian]
7/1/05
Why Is A High Level Of Employment Typically A Microeconomic Policy?
The Government has a strong incentive to maximise the size of the labour force and ensure that as many people are working as possible. Fiscally it is more beneficial because tax revenues increase during periods of high employment, as the Government has more people earning and therefore it receives more tax receipts. Low levels of unemployment would result in reduced social security payments which can be more beneficially spent elsewhere in the economy.
If there are more people working then the economy is closer to the production possibility frontier, which results in people earnings increasing and there being and there possibly being a wider range of goods available in the economy. These factors may also result in higher rates of growth in the economy over time, as the higher levels of demand in the economy may encourage firms to innovate to maximise their profit potential in the larger economy.
Frictional and structural unemployment and hysteresis can result in huge social problems. People out of work encounter huge stresses in attempting to find new employment, as they feel worse about themselves and are concerned about their declining standard of living. This can also result in crime because some people may consider it an easier option. This can be especially true for individual areas, with the decline in an industry or service predominantly effecting the same social classes or skills groups. In some cases if they live close to each other in an area such an economic decline could increase crime levels significantly.
Employment is usually considered on a macroeconomic rather than a microeconomic level to deal with unemployment. It is considered more cost and time effective to alleviate structural and frictional problems with job centres and work schemes or tackle persistent unemployment through the whole economy. The microeconomic response would have to address individual markets and it would probably be a lot more difficult and inefficient to correct than a more general macroeconomic policy.
This article was written by Jonathan McHugh in June 2005
If there are more people working then the economy is closer to the production possibility frontier, which results in people earnings increasing and there being and there possibly being a wider range of goods available in the economy. These factors may also result in higher rates of growth in the economy over time, as the higher levels of demand in the economy may encourage firms to innovate to maximise their profit potential in the larger economy.
Frictional and structural unemployment and hysteresis can result in huge social problems. People out of work encounter huge stresses in attempting to find new employment, as they feel worse about themselves and are concerned about their declining standard of living. This can also result in crime because some people may consider it an easier option. This can be especially true for individual areas, with the decline in an industry or service predominantly effecting the same social classes or skills groups. In some cases if they live close to each other in an area such an economic decline could increase crime levels significantly.
Employment is usually considered on a macroeconomic rather than a microeconomic level to deal with unemployment. It is considered more cost and time effective to alleviate structural and frictional problems with job centres and work schemes or tackle persistent unemployment through the whole economy. The microeconomic response would have to address individual markets and it would probably be a lot more difficult and inefficient to correct than a more general macroeconomic policy.
This article was written by Jonathan McHugh in June 2005
6/28/05
Why Is A High Level Of Employment Typically A Microeconomic Policy?
The Government has a strong incentive to maximise the size of the labour force and ensure that as many people are working as possible. Fiscally it is more beneficial because tax revenues increase during periods of high employment, as the Government has more people earning and therefore it receives more tax receipts. Low levels of unemployment would result in reduced social security payments which can be more beneficially spent elsewhere in the economy.
If there are more people working then the economy is closer to the production possibility frontier, which results in people earnings increasing and there being and there possibly being a wider range of goods available in the economy. These factors may also result in higher rates of growth in the economy over time, as the higher levels of demand in the economy may encourage firms to innovate to maximise their profit potential in the larger economy.
Frictional and structural unemployment and hysteresis can result in huge social problems. People out of work encounter huge stresses in attempting to find new employment, as they feel worse about themselves and are concerned about their declining standard of living. This can also result in crime because some people may consider it an easier option. This can be especially true for individual areas, with the decline in an industry or service predominantly effecting the same social classes or skills groups. In some cases if they live close to each other in an area such an economic decline could increase crime levels significantly.
Employment is usually considered on a macroeconomic rather than a microeconomic level to deal with unemployment. It is considered more cost and time effective to alleviate structural and frictional problems with job centres and work schemes or tackle persistent unemployment through the whole economy. The microeconomic response would have to address individual markets and it would probably be a lot more difficult and inefficient to correct than a more general macroeconomic policy.
This article was written by Jonathan McHugh in June 2005
If there are more people working then the economy is closer to the production possibility frontier, which results in people earnings increasing and there being and there possibly being a wider range of goods available in the economy. These factors may also result in higher rates of growth in the economy over time, as the higher levels of demand in the economy may encourage firms to innovate to maximise their profit potential in the larger economy.
Frictional and structural unemployment and hysteresis can result in huge social problems. People out of work encounter huge stresses in attempting to find new employment, as they feel worse about themselves and are concerned about their declining standard of living. This can also result in crime because some people may consider it an easier option. This can be especially true for individual areas, with the decline in an industry or service predominantly effecting the same social classes or skills groups. In some cases if they live close to each other in an area such an economic decline could increase crime levels significantly.
Employment is usually considered on a macroeconomic rather than a microeconomic level to deal with unemployment. It is considered more cost and time effective to alleviate structural and frictional problems with job centres and work schemes or tackle persistent unemployment through the whole economy. The microeconomic response would have to address individual markets and it would probably be a lot more difficult and inefficient to correct than a more general macroeconomic policy.
This article was written by Jonathan McHugh in June 2005
6/1/05
What Is Meant By Full Employment?
Full employment exists when all firms in the economy are able to hire all the labour that they want at the equilibrium wage rate and all the workers are prepared to accept jobs at that wage rate are employed. It also takes into account structural and frictional unemployment, discouraged workers and the effect of technology on employment. However, there are ways dynamically to adjust the level of employment through addressing problems with involuntary and voluntary unemployment.
In figure 1 the equilibrium of full employment is represented on point A (labour size N*, wage rate W*), as it is the intersection between line NS, the aggregate of workers desires to accept jobs at particular real wage rates and line ND, the aggregate of firms desires to employ labour at particular wage rates.
Any other level of employment would not be regarded as full employment and any wage above the equilibrium’s wage rate of W* would create unemployment. For example, trade unions may be able to ask for a minimum wage, say W1. At W1 the higher wage rates would create an incentive for more of the labour force to seek employment, as they would be financially better off. Similarly, the higher wages would create a disincentive for firms to employ as many workers, as their revenues would decrease. As a consequence there will be a move from full employment to unemployment, with the size of unemployment being between N2 and N3. This is created as a result of the W1 wage rate creating a greater desire for labours to supply their services than for the firms to employ them. The only way to reduce these effects and bring back full employment would be to reduce the wage rate from W1 to W*
Trade unions may also be able to put training requirements on working in a market, which would shift the NS curve to the left to NSu. In this example the size of unemployment created would be between N2 and N3 as a result of these employment barriers.
There are people who are unable to find work despite their desire to, as structural and frictional problems prevent them. Many people are unable to find work because there aren’t jobs available in their area or their professions are in decline. For example, a coal miner could be unemployed in his hometown as a result of the local pit which hired the majority of the village closing down, despite the fact that he has the desire to work. In such a case he may have to work elsewhere, even abroad to match his skills with a company, at possibly huge emotional distress.
Frictional unemployment exists because of the inefficiencies involved in matching up the right employee to the right job, which normally takes significant time and results in people being unemployed in the interim. The size of these unemployed workers for both structural and frictional problems is the difference between N*, the aggregate of workers prepared to accept jobs and N1, the aggregate of people willing to accept jobs at the correct price but are unable to find the right ones. They are not classified as disrupting full employment in the labour market, as they are unable to initiate the decision to accept or refuse an employers offer in the short run. However, over time these will erode individual reasons for lack of employment but will be replaced by similar circumstances elsewhere in the economy. If the government was able to reduce these effects then the NS curve would shift to the right, closer to the LF curve, the curve representing the aggregate of the willing to work labour market. As a result, the level of full employment would increase.
There are people who are able to work in the economy but choose not to as they do not have the inclination and find the opportunity cost of employment too great. For example, they may consider the cost of finding a job too strong to justify the benefits of working and so they remain economically inactive. The size of this hysteresis in an economy is the difference between N1, the level of the labour force offering their services and NT, the total size of the labour force population in the short run. These people are not classed as effecting the labour market as they have chosen to stay out of the economic bargaining for employment or to make the effort to approach firms. However, reducing the subsidies given to the unemployed or improving the skills for these people to give them higher earning potential would increase their incentives to work and it should shift the NS curve (and possibly the LF curve) to the right and increase the level of full employment.
Advances in technology can have bearings on the level of employment in an economy as firms realise that they are able to employ less employees with the same amount of output with new capital. Figure 2 shows a set of production possibility frontiers. If there was an improvement in technology there would be a shift in the PPF curve from y=f(N) to y=f’(N). Consequentially, the output level Y1 can be produced using only N2 levels of labour, a reduction of labour in the economy. However, the reduction in labour should reduce output costs which should lower market price and then stimulate market demand so that output may increase to Y2, an increase in employment to N3.
This piece was written by Jonathan McHugh in June 2005
In figure 1 the equilibrium of full employment is represented on point A (labour size N*, wage rate W*), as it is the intersection between line NS, the aggregate of workers desires to accept jobs at particular real wage rates and line ND, the aggregate of firms desires to employ labour at particular wage rates.
Any other level of employment would not be regarded as full employment and any wage above the equilibrium’s wage rate of W* would create unemployment. For example, trade unions may be able to ask for a minimum wage, say W1. At W1 the higher wage rates would create an incentive for more of the labour force to seek employment, as they would be financially better off. Similarly, the higher wages would create a disincentive for firms to employ as many workers, as their revenues would decrease. As a consequence there will be a move from full employment to unemployment, with the size of unemployment being between N2 and N3. This is created as a result of the W1 wage rate creating a greater desire for labours to supply their services than for the firms to employ them. The only way to reduce these effects and bring back full employment would be to reduce the wage rate from W1 to W*
Trade unions may also be able to put training requirements on working in a market, which would shift the NS curve to the left to NSu. In this example the size of unemployment created would be between N2 and N3 as a result of these employment barriers.
There are people who are unable to find work despite their desire to, as structural and frictional problems prevent them. Many people are unable to find work because there aren’t jobs available in their area or their professions are in decline. For example, a coal miner could be unemployed in his hometown as a result of the local pit which hired the majority of the village closing down, despite the fact that he has the desire to work. In such a case he may have to work elsewhere, even abroad to match his skills with a company, at possibly huge emotional distress.
Frictional unemployment exists because of the inefficiencies involved in matching up the right employee to the right job, which normally takes significant time and results in people being unemployed in the interim. The size of these unemployed workers for both structural and frictional problems is the difference between N*, the aggregate of workers prepared to accept jobs and N1, the aggregate of people willing to accept jobs at the correct price but are unable to find the right ones. They are not classified as disrupting full employment in the labour market, as they are unable to initiate the decision to accept or refuse an employers offer in the short run. However, over time these will erode individual reasons for lack of employment but will be replaced by similar circumstances elsewhere in the economy. If the government was able to reduce these effects then the NS curve would shift to the right, closer to the LF curve, the curve representing the aggregate of the willing to work labour market. As a result, the level of full employment would increase.
There are people who are able to work in the economy but choose not to as they do not have the inclination and find the opportunity cost of employment too great. For example, they may consider the cost of finding a job too strong to justify the benefits of working and so they remain economically inactive. The size of this hysteresis in an economy is the difference between N1, the level of the labour force offering their services and NT, the total size of the labour force population in the short run. These people are not classed as effecting the labour market as they have chosen to stay out of the economic bargaining for employment or to make the effort to approach firms. However, reducing the subsidies given to the unemployed or improving the skills for these people to give them higher earning potential would increase their incentives to work and it should shift the NS curve (and possibly the LF curve) to the right and increase the level of full employment.
Advances in technology can have bearings on the level of employment in an economy as firms realise that they are able to employ less employees with the same amount of output with new capital. Figure 2 shows a set of production possibility frontiers. If there was an improvement in technology there would be a shift in the PPF curve from y=f(N) to y=f’(N). Consequentially, the output level Y1 can be produced using only N2 levels of labour, a reduction of labour in the economy. However, the reduction in labour should reduce output costs which should lower market price and then stimulate market demand so that output may increase to Y2, an increase in employment to N3.
This piece was written by Jonathan McHugh in June 2005
How Might Unemployment Be Above The Natural Rate?
Prior to the drop in demand the economy was resting at point A, wage level W* and employment level N* in figure 4. There is a shift in the demand for labour by the firms from P0 to P1 as a result of less profitability in the economy. If the employees as a result of trade unions encourage wage stability (or sticky wages) then the price level would remain at W*. This has the effect of creating voluntary employment between N1 and N* as the real wage has been forced up as the price level has lowered and the wages have remained the same. If employees do not perceive a price level fall but supply to their expected real wage not money wage, then NS0 remains the supply curve as they haven’t perceived the fall in the price level. They will then accept a lower monetary wage as the real wage has increased as a result of the price level falling faster than their wages. This is still voluntary, as a further fall in money wages would reduce real wages back to the equilibrium level. In the long run the stickiness of wages should erode following contract negotiations over time, which should shift the labour supply curve from NS0 to NS1, resulting in full employment at N* but a lower wage rate of W2.
Voluntary unemployment occurs when a decline in the output of the economy from Y* to Y1 (shown by figure 3) prevents firms from selling as many goods as before. As a consequence there will be a shift in the labour demand curve from ND0 to ND1 in figure 4 and the firms will not hire beyond N1 as any extra employment would reduce their profits. As a result the labour demand curve B C N1 is kinked at C on figure 4. If the money wage stays at W* then D will not be anywhere near the unconstrained supply or demand curves, creating involuntary employment as a result. Consequentially, because workers cant price themselves in being employed at lower wages there will not be a reduction in the level of unemployment in the economy.
Returning to figure 1, with NC (the constrained labour demand) being the total level of employment and W* being the wage rate there would be cyclical unemployment between NC and N* and structural and frictional unemployment between N* and N1. At wage rate W1 cyclical unemployment would be between NC and N2, classical unemployment between N2 and N3 and frictional and cyclical unemployment between N3 and N4. Such demand deficient unemployment can add to hysteresis and result in increased structural unemployment and a shift of the labour force and labour supply curves to the left as a result of discouraged people not being able to find positions and loosing their skills.
5/8/05
Define and explain fully what is meant by full employment. Why might unemployment be above the natural rate? Why is a high level of employment typical
Now we know that full employment is any level of unemployment found in natural labour market equilibrium with only voluntary unemployment, let us look at natural unemployment. Structural unemployment is commonly talked about in the press, as a major initiator in the U.K. is often perceived as the transformation that came about in the 1980’s party due to Thatcherite policies (more or which later). It is caused by a market failure arising from “mismatches between job applicants and vacancies with respect to skills, occupations or localities.”[2] These mismatches then occur because within the national labour market there are numerous different markets based on the above variations. Most commonly is the geographical factor. This occurs when an employee suitable for a vacancy lives far enough from the vacancy to make the cost of accepting the job greater than the benefit. The opportunity cost of being unemployed (being employed) is too great. For example a highly skilled ship carpenter may be located in Tyneside, while a there is a vacancy in
Our ship carpenter would require learning new skills to be compatible with the job. He would have to catch up with any changes in the required composition of output (in this case perhaps safety features required or new materials to work with). Structural unemployment is considered voluntary, as it is technically the employee’s choice not to move to a market where there is excess demand rather than supply.
With frictional unemployment we have a number of employees and employers; each with relevant skills and vacancies, but who have not yet been able to find each other or because of imperfect information (and attempts to correct it) not hired anyone yet. For example another ship worker and a company looking for a nautical engineer - it takes time to find the vacancy advertised and will then have to be interviewed, his references checked and the company decide if they can find anyone with more experience relevant or if he is sufficient. In addition the workers reservation wage, the wage he or she expects to obtain, may be inaccurate. This is especially common when seeking jobs in unfamiliar regions and even countries in the EU, and means that workers are either over-valuing themselves or will be undervalued by a prospective employer.
Structural and frictional unemployment can be shown diagrammatically. On figure 1 we can see a labour demand curve ND, a total labour force LF and an labour supply curve NS(aj) (The ‘aj’ is for accept jobs and represents the number of people who will accept jobs at a wage rate). There is a natural equilibrium wage rate of W* and N* employment at point A. 0 to N* represents full employment at this equilibrium, while N* to N1 represents structural and frictional unemployment.
Technical change in an industry can have a huge effect on the numbers in full employment as it can change the demand curve for labour. Figure 2 shows a set of production possibility frontiers. Starting at output Y1 if we then had an improvement in technology, shifting the p.p.f. from its initially fixed position y=f(N) to y=f’(N) we see that Y1 can be produced using only N2 labour. This causes a reduction in employment, but also a reduction in unit costs of production; meaning firms’ profit maximising price is lower. This will mean a reduction in market price. Should this stimulate the market demand (as it should if it is anything but perfectly inelastic) there can be an increase in output, say to Y2, which will require an increase in employment. That said a further move in technology to the p.p.f. y=f’’(N) will mean Y2 can be produced at only N4. This is clearly an important factor in full employment as technology is always being pushed forward by companies seeking to gain production advantage over their competitors.
It is possible here to link the last three factors together. Some external explanations for unemployment focus on the changes to production structure caused by economic globalisation and economies of scale from large international factories instead of small little ones, creating mismatch problems and so greater structural unemployment[3]. Hysteresis has commonly been sited as increasing structural unemployment. This is whereby after a long period of job searching workers loose motivation and confidence, the skills gap broadens as time goes on and frictional unemployment can soon change to structural. Employers are reluctant to hire someone who has been out of work for some time as the reason for the gap may not be obvious. This causes the natural rate to rise. Full employment’s natural equilibrium may be affected therefore by larger technical changes and longer periods of mass unemployment.
An additional cause of natural unemployment is classical or real wage unemployment, or that caused by an overly high national minimum wage. Either trade unions or workers collectively have negotiated a wage higher than the equilibrium real wage, W* on fig 1, let us say W1. This creates a position where the real NS (AJ) curve runs horizontally from W1 to the point where it meets NS (AJ) and then follows it upwards, shown by the red line on fig 1. This intersects ND at point B. NSu illustrates the union supply curve. We can now clearly see we have lower full employment, at N2, with unemployment due to an inflated real wage being N2 – N3, and structural and frictional unemployment being N3 to N4 (N3 being how many people would accept jobs at W1, and N4 being how many would seek jobs at W1). This remains natural unemployment, and N2 full employment because that is the equilibrium at W1, and it is institutional factors that cause the wages to remain high. It must be realised though that this type of unemployment is rare in modern economies now.
Demand deficient unemployment can have two effects. One is on voluntary and so natural rate of unemployment, the other creating involuntary, cyclical or Keynesian unemployment as we shall see in a moment. The dependent factor is whether or not workers expect and can respond flexibly to a drop in the price level. Consulting figure 3 we see a diagram not adjusted for price level. Initial equilibrium is at W*, A, N* where NS (P0) and ND (P0) (for price level P0). The economy experiences a sudden drop in price level to P1 and Demand. If the workers are successful in maintaining the price level at W* through contracts and sticky wages we have a restricted supply curve as with real wage unemployment. The resulting unemployment N1 – N* is voluntary as workers have inadvertently or not forced ‘real’ wages up (because the price level has dropped while money wage levels remain the same). If workers do not perceive a price level fall but supply to their expected real wage not money wage, then NS (P0) remains the supply curve, because they haven’t perceived the fall in price level, but will accept a lower monetary wage as real wage has increased (price level has still fallen further than wages). Again this is voluntary, as a further fall in money wages would reduce real wages back to equilibrium levels. However this can only happen if they perceive the fall in price level. It may not be possible, if they do perceive it, to move to NS(P1) due to sticky wages of some and long term labour contracts, so it is only possible in the long run which will still create some voluntary unemployment. Equilibrium will only return in the long run if wages are perfectly flexible though and they can drop to W2 in figure 3.
This is voluntary and so natural rate unemployment. However in reality a fall in price level is very rare, indeed
If we look at a fall in aggregate demand without a drop in price level, that is to say a perfectly elastic aggregate supply curve, like that in figure 4, we can obtain involuntary, Keynesian or cyclical unemployment, when unemployment is above the natural rate. Y* gives us a natural rate of unemployment that can be seen on figure 4 when we realise that N*, i.e. quantity of labour demanded, is a function of Y*, the demand for the product of labour. We will have only natural unemployment.
However a fall in demand prompts a reduction in output to Y1 as that is all the firm can sell in a quantity controlled goods market. This creates demand for labour of N1, creating a labour demand curve B C N1, kinked at C on Figure 3. If the money wage remains at W* we can see D is nowhere near either the unconstrained supply or demand curves, thus we have involuntary unemployment. Lowering the money wage will not actually reduce unemployment, as workers can’t price themselves into being employed.
We can see this translated onto figure 1 where we see Nc – the constrained labour demand, being the total level of employment, giving us at W* cyclical unemployment of Nc to N* and structural and frictional unemployment N* to N1. We may also have some real wage unemployment at the same time with real wages too high at W1 and cyclical unemployment Nc – N2, classical N2 – N3 and N3 – N4 frictional and structural. It is entirely possible to have a situation of cyclical unemployment in the case of a large economy such as the
High level of employment is consistently a macroeconomic policy objective for a number of reasons. First there is extensive political pressure from the public, nearly everyone has to have, and wants a job. Employment is essential to the economy, as with out it there simply would be no economy; high levels of employment are likely (but not certain) to provide higher levels of aggregate demand as more people have more money to spend and will also help to raise average standards of living. Employment provides individuals with earning that are then taxed by government. Public choice or individualist public policy theorists would argue that it is in bureaucrat’s interest to maximise revenues from employment tax so they can expand their budgets for their own prestige[5]. This is a little torturous, however it is clear that government would want to maximise its tax revenue and limit its social welfare payments. Costs are not just the direct welfare payments but additional social costs of unemployment. Structurally unemployed individuals will naturally have a lower income and as Mocan argues it is likely to increase income inequality in the country if structural unemployment grows, and can then foster additional social problems causing even more cost to the public purse[6]. In my opinion however government’s main aim is to reduce unemployment, either by moving people into employment or into being inactive. In the short run government can raise employment by stimulating demand (the opposite of cyclical unemployment – above) or focusing on policies to reduce structural and frictional unemployment, for example through job centres, CV clinics and so on. In the short run they could also raise the level of the inactive population.
Encouraging people to become inactive has significant benefits. As the group consists of those in education, encouraging the structurally and frictionally unemployed to enter training can help them transfer to industries with demand greater than supply of labour by updating skills in the medium and long run. This will also have the effect, especially amongst the young, of pushing forward the countries Production Possibility frontier that will increase employment in the long run. Having some unemployed move to the inactive market also means that if there is an external increase in demand to domestic labour, say through an increase in demand for exports, the economy will have room to expand.
Governments have effects on the levels of employment both directly and indirectly through policy instruments. The effect of the levels of unemployment assistance on both employment and unemployment levels has been a key issue in the last 25 years. Larsen describes how some have blamed systems in the EU for high unemployment, and although the concept of eurosclorosis has been largely discredited (see chapter 6 of Blanchard), the effects of a poorly planned benefit system are clear. Figure 5 shows an initial equilibrium at A, with Wage W*, and N* employment, and N* - N1 unemployment. An increase in the amount paid for unemployment benefits or the time they are paid for will reduce the opportunity cost of being unemployed both for those inactive and employed. Marginal individuals will decide they are better off registered as unemployed rather than employed or inactive. A well structured social security benefit system that pays benefits only for those actively seeking employment, and forces people to accept jobs will increase employment.
Eurosclorosis theorists argued that over regulation of employers regarding employment would create additional costs of employing someone, thus reducing the labour demand curve. The same effect is seen with any cost or tax. This is shown in figure 6. A tax on employees will reduce real disposable income from any money wage, thus a lower supply curve at any particular money wage, and this is shown in figure 7. The effects of these actions are primarily on employment as they involve a shift in N*.
In conclusion we can say that full employment involves any level of employment that results from natural equilibrium in the labour market, with a natural rate of unemployment existing at the same time. This can vary for structural, frictional and real wage unemployment. Unemployment may rise above the natural rate when Keynesian demand deficient or cyclical unemployment occurs, usually during a recession, as there is no change in the price level. Governments have a high level of employment as a policy aim because it allows for what I believe to be their primarily aim of reducing unemployment, either by increasing employment in the short run buy boosting demand in a Keynesian way or in the long run by increasing labour productivity by moving people into the inactive section of the population so they can retrain. Government seek to reduce unemployment, because of political pressure, it allows them to maximise tax revenue and can reduce the chance of instability by increasing aggregate demand.
** All general facts, theories on types of employment and unemployment and factors affecting them, and graphs above are taken from Lecture notes – Mr M Macmillen 2005
-------------------------------
Bibliography
+ Mr M. Macmillen - EPP Lecture Notes – 2005
+ Oliver Blanchard - Macroeconomics, second edition – 1999
+ Christian Larsen - Structural unemployment. An analysis of recruitment and selection mechanisms based on panel data among Danish long term unemployed. –2003 – International Social welfare 12 pp170-181
+ Mocan, H. Naci – Structural unemployment, cyclical unemployment and income inequality – 1999 – The review of economics and statistics 81 (1) pp 122 – 134
+ Camarero and Tamarit – Hysteresis vs. natural rate of unemployment – 2004 – Economic Letters 84 pp 413 - 417
3/12/05
Is Economic Interventionism Dead? Illustrate with the comparison of France and another European country
The Success and Decline of Domestic Direct Economic Interventionism
Since the 1940s France has been “inspired by a desire to modernise French industry in the wake of the Second World War,”[1] and developed a dirigiste economic model in which the state was responsible for modernising the economy for fears “that small businesses and antiquated firms would not be able to compete effectively against German and American firms as trade expanded in the post-war world, the French policy-makers of the 1940s and 1950s used the resources of the state to encourage French industry and agriculture to increase the scale of production through mergers and acquisitions, to shift capital and labour into high-technology sectors, and to eliminate less efficient producers in favour of firms that could prosper on international markets.”[2] President Charles de Gaulle, one of the architects of the plan described these firms as “national champions carrying the banner of
To implement the strategy, “the state established a planning system that set investment and production targets for major industrial sectors in consultation with leading firms, and successive governments used their influence over large, state-owned banks to channel resources to firms identified as most promising.”[5] There was a negative attitude toward foreign investment, with “discouragement, even opposition to the introduction of multinationals in
As Hall points out, the modernisation was highly successful for a prolonged period, as “the French economy grew faster than any other in
However, from the 1970s cracks started to show in the dirigiste model.
This was made worse by
Perez felt that “the French economy has suffered from overinvestment or delayed adjustment in certain sectors benefiting from protective measures, monopoly situations, or state financial aid.”[22] Godt agrees with Perez’s assertion that
It eventually became apparent to Mitterrand that “the post-war dirigiste policy program of state-led economic development was no longer doing what the Gaullist discourse of French economic prowess, growth, and grandeur had initially promised.”[30] And so in 1983 the Socialists accepted that “their policy was unsustainable economically, and jettisoned the discourse along with the policy program.” Schmidt argued that Mitterrand’s changes, unlike the changes brought about by Thatcher were “a matter of necessity, cognitively right but normatively difficult to legitimate, given its lack of fit with post-war socialist values.”[31]
The
With its guiding principles of Keynesian demand management providing both high employment and low inflation the
However, by the 1960s chancellors had become too confident about their abilities to control the economy, using inaccurate forecasts to estimate how the economy would perform and using imprecise policy instruments to anticipate them. This created what became known as the ‘Stop-Go Cycle’, where the government would constantly make very minor alterations to the economy in order to create the desired results.
Up until the 1970s there was little criticism of Keynesianism policies despite concerns with the Stop-Go Cycle, as there was stable inflation and it was considerably lower than the rate of growth. However, from the 1970s this appeared to be breaking down as inflation was starting to spiral out of control, creating stagflation, where both unemployment and inflation were increasing. Like
This spiral of inflation was worsened significantly by the oil crises and affected the
Like
However, it was not until Thatcher’s election in 1979 did monetarism gain ideological teeth, encouraged by the largest political swing since Clement Atlee’s Labour party in 1945. This gave the monetarist reformers the confidence to reduce the role of the state through a market based approach and so reduce the amount of economic interventionism. Infact, examining the far greater collapse in orthodox economics and the greater social friction occurring in the UK with the ‘Winter of Discontent’ that we may be able understand more clearly why the ideological shift in the UK was greater than in France.
Reform and Evolution of Domestic Economic Interventionism
The new imperatives of the French economy involved modernization and increased competition. There was a privatization of state banks and industrial enterprise and large deregulation. For example, there was virtually complete deregulation of prices, services, new rules on competition, reduced labour-market rigidities and the abolition of prior administrative approval for lay off and deregulation in the fields of transportation, telecommunication and energy. Hall suggested that the government moved away from macroeconomic interventionism to microeconomic policies, “aimed at the supply side of industry, to improve economic performance.”[35] However, Hall did emphasise that supply side policies were nothing new but the “nature of those policies has changed dramatically.”[36] There was also a shift from the larger ‘national champions’ to small enterprises which Hall felt were “much more effective creators of employment and often had a flexibility to weather macroeconomic storms that large firms lacked. As a result, an increasing share of the industrial budget has been earmarked for small enterprise.”[37]
These reforms resulted in a reduced burden on businesses, with a cut in corporate tax of nearly 20 billion francs[38] and the elimination of credit volume controls and an accelerated deregulation of the banking system. The transformation of banking was huge, with Godt finding it “none the less spectacular, given
Many French firms have experienced huge increases in productivity and are now the most profitable in continental
The French model has successfully moved away from its dirigiste past, with heavy state intervention, and the market’s increased role. However, in order to sweeten such sweeping reforms successive governments provided “interest-based incentives for those affected by economic restructuring.”[44] As Schmidt points out, “the Socialists did not in any way address the seemingly logical contradiction between an emphasis on belt-tightening neo-liberal policies and expansive social policies. But neither did subsequent governments, including the right-wing neo-liberal government in power between 1986 and 1988 which, despite the Thatcherite discourse, continued high social spending while reiterating its commitment to social solidarity even as it claimed to seek to increase individual responsibility, innovativeness and independence while engineering a retreat of the state.”[45]
In correcting the mistakes of focusing on industries with low skilled labour
Despite the end of dirigisme the contradiction of reduced economic interventionism but increased welfare highlight the fact that
Thatcher’s reforms were an attempt to make the UK a more self-reliant society, “from a give-it-to-me to a do-it-yourself nation; to a get-up-and-go instead of a sit-back-and-wait-for-it Britain,’ and the recognition that inequalities were necessary to encourage the ‘spirit of entrepreneurship’”[48] There was going to be no pussyfooting from such an ideologically driven government, with large levels of privatization from the 1980s in order to increase competition and shake up the market. There was also a movement away from the welfare state to a more laissez faire approach, as there was an ideological movement from equality to incentive focused equity.
However, a consequence of the privatisations was an explosion in the amount of regulation, to combat fears of market inefficiency and firms abusing their monopoly status, especially the utilities where there were concerns that the operators would abuse their social responsibility. Despite the decline in direct economic interventionism and social provisions the increase in regulation was creating problems, with the OECD concluding that “the regulatory task of designing a pro-competitive system of regulation based on the separation of potentially competitive and natural monopoly sections of this type of sector was an unfamiliar one for governments and presented enormous technical and economic difficulties.”[49] For instance, as a result of huge mutual and overlapping interests between regulators there were between 14,000 and 20,000 regulators in 1997, with annual costs between £700m, and £1bn.[50]
However, this issue was not tackled until 1999 when the Labour Government merged departments, such as the electricity and gas regulators and unified fire safety. There was also a move from the more aggressive style of giving demands to firms and public organisations to the “light touch enforcement of regulation.”[51] Hood described it as an aspiration to combine “the iron fist of Draconian central interventionism with the velvet glove of self-regulation,”[52] As a result there was a transfer of the main thrust of legislative effort onto areas of higher risk and underperformance and areas of low risk or strong performance were given less stringent reviews. For example, in 1997 OFSTEAD (the regulator for education) allowed plans for less stringent inspection of the best performing schools. This streamlining of policy although resulting in less regulatory interventionism actually turned the threat of regulation into a policy tool and thus the government could use threat of regulation as a means to intervene in the economy.
Since the Major Government there have been experiments with Public Finance Initiatives, whereby the marketplace is used to provide public goods in refuse collection, hospitals, prisons and more recently the London Underground. Although this measure is intended as a withdrawal of the governments role in society the agreements, regulation and government aid result in more economic interventionism than even privatization. For example, the government is obliged to bail out companies with huge losses, such as the part privatised air traffic control system (NATS) which received £30m in 2002 as a result of reduced passenger numbers following the September 11th terrorist attacks.
The first act of the Labour Government was to announce the independence of the Bank of England in order to wash its hands of errors such as the Lawson boom and leave control of monetary policy in the hands of the experts rather than interfering politicians. There has also been no intervening in the exchange rate as a result of the Major Government being burned in 1992, so now governments find it difficult to hide poor economic performance with devaluations.
New Labour was not concerned with reversing the monetarists’ economic shift significantly when they came to power in 1997, and was prepared to “junk Keynes wholesale and accept the new right consensus that budget deficit manipulation only disturbs the natural rhythms of the economy”[53] and also being “no longer committed to universal state ownership and the re-nationalisation of the privatized utilities, but rather stresses the importance of firms and industries which are recognised as world-class competitors in several sectors, characterised by high technology (R&D intensive) and high value-added processes and skills.”[54] The commitment from a left wing government to not directly intervening in the economy shows a clear signal that old style economic interventionism is dead, although the regulatory effects is its adept replacement, especially more so than France considering the more developed nuances in the UK.
However, there has been a shift towards welfare again, with the introduction of the minimum wage and the New Deal. Despite this the increases in welfare are not as significant as in
Effects of the EU on Economic Interventionism
Since the 1990s the growth of European policy developments “began to conflict significantly with dominant perceptions of French state identity and ideological constructions,”[56] as European Competition policy clashed with the “dominant French perceptions of appropriate state intervention in the economy.”[57] The creation of the single continental market in 1992 removed 300 barriers to trade in
However, Howarth disagrees, suggesting that “European integration and policy developments (for example, the creation of CAP) were acceptable to the extent that they served French economic and foreign policy objectives and reinforced – or at least did not undermine or fundamentally alter – traditional dominant perceptions of French state identity.”[60] The response of
Thatcher’s approach to
Blair’s commitment to European integration was more evident with his granting the Bank of England independence and opting into the Social Chapter of the Maastricht Treaty. However, the legacy of euro scepticism following Black Wednesday has prevented Blair from making strong moves towards joining the euro or taking as strong a lead in
The
This report was written by Jonathan McHugh in March 2005
[1] Peter Hall, Jack Hayward and Howard Machin Developments in French Politics (The Machmillan Press Ltd) 1994. p171
[2] Ibid. p173
[3] Ibid. p174
[4] Ibid.
[5] Ibid.
[6] Godt Policy Making in
[7] Godt Policy Making in
[8] Godt Policy Making in
[9] Godt Policy Making in
[10] Peter Hall, Jack Hayward and Howard Machin Developments in French Politics (The Machmillan Press Ltd) 1994. p174
[11] Godt Policy Making in
[12] Peter Hall, Jack Hayward and Howard Machin Developments in French Politics (The Machmillan Press Ltd) 1994. p174
[13] Peter Hall, Jack Hayward and Howard Machin Developments in French Politics (The Machmillan Press Ltd) 1994. p175
[14] Peter Hall, Jack Hayward and Howard Machin Developments in French Politics (The Machmillan Press Ltd) 1994. p175
[15] Peter Hall, Jack Hayward and Howard Machin Developments in French Politics (The Machmillan Press Ltd) 1994. p174
[16] Peter Hall, Jack Hayward and Howard Machin Developments in French Politics (The Machmillan Press Ltd) 1994. p174
[17] Godt Policy Making in
[18] Perez S.A Systemic Explanations, Divergent Outcomes: The Politics of Financial Liberalization in
[19] Perez S.A Systemic Explanations, Divergent Outcomes: The Politics of Financial Liberalization in
[20] Flanagan R, Soskice DW and Ulman L Unionism, Economic Stabilization and Incomes Polices: European Experience.(Brookings Institution). p23
[21] Perez S.A Systemic Explanations, Divergent Outcomes: The Politics of Financial Liberalization in
[22] Perez S.A Systemic Explanations, Divergent Outcomes: The Politics of Financial Liberalization in
[23] Godt Policy Making in
[24] Peter Hall, Jack Hayward and Howard Machin Developments in French Politics (The Machmillan Press Ltd) 1994. p175
[25] Zysman, J Governments, Markets and Growth (
[26] Peter Hall, Jack Hayward and Howard Machin Developments in French Politics (The Machmillan Press Ltd) 1994. p175
[27] Peter Hall, Jack Hayward and Howard Machin Developments in French Politics (The Machmillan Press Ltd) 1994. p181
[28] cited from Godt Policy Making in France (Pinter Publishers London and
[29] Godt Policy Making in
[30]
[31]
[32] Curwen P, Hartley K, Hooper N and Marshall P Understanding the
[33]
[34] Smith D The Rise and Fall of Monetarism (Pelican). 1988. p65
[35] Peter Hall, Jack Hayward and Howard Machin Developments in French Politics (The Machmillan Press Ltd) 1994. p181
[36] Peter Hall, Jack Hayward and Howard Machin Developments in French Politics (The Machmillan Press Ltd) 1994. p181
[37] Peter Hall, Jack Hayward and Howard Machin Developments in French Politics (The Machmillan Press Ltd) 1994. p182
[38] Godt Policy Making in
[39] Godt Policy Making in
[40] Peter Hall, Jack Hayward and Howard Machin Developments in French Politics (The Machmillan Press Ltd) 1994. p178
[41] Peter Hall, Jack Hayward and Howard Machin Developments in French Politics (The Machmillan Press Ltd) 1994. p180
[42] Cited from Peter Hall, Jack Hayward and Howard Machin Developments in French Politics (The Machmillan Press Ltd) 1994. p178
[43] Milner S Globalisation and Employment in
[44]
[45]
[46] Cited from Peter Hall, Jack Hayward and Howard Machin Developments in French Politics (The Machmillan Press Ltd) 1994. p179
[47] Peter Hall, Jack Hayward and Howard Machin Developments in French Politics (The Machmillan Press Ltd) 1994. p179
[48] Hedetoft, Ulf and Hiss, Hanne Taking Stock of Thatechism (Department of Languages and International Studies) 1991
[49] OECD Regulatory Policies in OECD Countries: From Interventionism to Regulatory Governance (
[50] Cited from OECD Regulatory Policies in OECD Countries: From Interventionism to Regulatory Governance (
[51] Regulatory Reform: The Government’s Action Plan Internet (www.cabinetoffice.gov.uk/regulation) 2003.
[52] Hood, James and Scott Regulation of Government: Has it Increased, is it Increasing, Should it be Diminished? (Blackwell Publishers Ltd) 2000. p283
[53] Arestis P and Sawyer M The Economic Analysis Underlining the ‘
[54] Curwen P, Hartley K, Hooper N and Marshall P Understanding the
[55] Kelly R Response to Will Hutton (Political Quarterly) 1998. p103
[56] Howarth D The European Policy of the Jospin Government: A New Twist to Old French Games (Modern and Contemporary
[57] Howarth D The European Policy of the Jospin Government: A New Twist to Old French Games (Modern and Contemporary
[58] Hall P,
[59] Hall P,
[60] Howarth D The European Policy of the Jospin Government: A New Twist to Old French Games (Modern and Contemporary
[61] Howarth D The European Policy of the Jospin Government: A New Twist to Old French Games (Modern and Contemporary
[62] Howarth D The European Policy of the Jospin Government: A New Twist to Old French Games (Modern and Contemporary
[63] Levy J. D. France: directing adjustment, in Scharof F. and V. Schmidt Welfare and
Work in the Open Economy. Volume II. Diverse Responses to Common Challenges (
University Press) 2000. p. 331
[64]
[65] Busch, Andreas Central bank independence and the
European Politics). 1994. p53–72.
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