Well yeah and something like that

0
28

Remember the “Phillips curve,” the idea that the tighter the labor market gets, the more it pushes up wages and therefore inflation?

It used to be the lodestar of those who set interest rates everywhere; the lower the unemployment rate, the higher the likely inflation rate, and vice versa.

For much of the postwar period, the Phillips curve was as good a guide as any on the likely path of inflation and thus was at the center of much of central bank thinking about the proper orientation. of monetary policy.

Was, as said, an observation that held true. Although the exact mechanism is a bit more complicated. Yes, we can and do talk about wage-driven inflation. And I am very insecure.

It is true that I tend to think that most macroeconomics is far-fetched. Simply because we don’t have enough observations from enough different places and times to be able to classify all the different variations of what the causes might be. We are still in the macro stage of noticing correlations but we really don’t have much of a clue as to the causes. However, that is a very personal observation. And undoubtedly, at least in part, because I don’t like the macro anyway – saying it doesn’t work is a great way not to have to study it.

Still, Phillips Curve. I tend to think that it’s not really about unemployment and inflation. That unemployment is not the true variable. Rather, it is the surplus capacity (effective capacity, a new currency, a neologism, to be similar to effective demand) in the economy that is the true variable, unemployment is simply a substitute for it.

This helps explain why the curve can change and move along it. If the structure of the labor market changes, the unemployment rate becomes a different measure of the available capacity in the economy.

But what matters is spare capacity, not purely surplus labor. The link is between inflation and an economy that produces as much as it can, or not, given its current structure. Unemployment is a symptom, perhaps a sign of that ability.

But then, as I say, I don’t like the macro, therefore I don’t know much about it.

LEAVE A REPLY

Please enter your comment!
Please enter your name here