What’s natural about unemployment?

More on the labour market and unemployment from my Macroeconomics Theory course: “The natural rate of unemployment is the unemployment rate such that the actual inflation rate is equal to the expected inflation rate.” This idea has been guiding economic policy since the 1970s. Let’s unpack it.

The two main components of the prices that are subject to inflation, are the markup (m) on production costs in sale prices, and factors that increase the bargaining power of workers (quaintly called z in macroeconomic equations), such as unions, minimum wages, job security, unemployment benefits – all things that have been squeezed in recent decades.

So, looking at markup, the inflation rate and the unemployment rate are both products of the contest between capital and labour over the effective size of the markup, the markup being at the core of profits and capital accumulation.

Profits are capital’s way of retaining (or appropriating) output beyond that paid in wages for household consumption. Capitalists then choose what parts of the value of that retained extra output to allocate to further investment and accumulation, or to their own personal consumption and pet projects.

Wage and labour condition demands are an important way for labour to gain an increased share of that output, but that can only be at the expense of capital’s share. Capital controls the markup, and accordingly inflation, and contests labours’ demands for a larger share of output.

It’s good not to consume everything we produce all at once, it’s good to save or to work on things that may not provide a benefit for sometime, or will provide a benefit for a long time to come, eg infrastructure, productive capacity, environmental repair. But when the savings that can be put to these purposes are decided by and kept in the hands of private capital, they are outside the power of labouring-consuming citizens. We feel we can only squabble for our little share for immediate consumption, and not make decisions about the far more important portion of savings and investments which affect the future shape of our society and world.

We might battle over price markup, wages and employment, but we don’t get to consider the wise allocation of resources to longterm purposes. Instead, as labour we are the victims of an imposed unsatisfactory unwinnable choice. At the macro level the choice is between the wages and conditions of those who are employed versus the proportion of would be workers who are un or under-employed. At the individual and union level this choice makes for employees who are reluctant to challenge the employers’ share of output, and become trapped in a downward spiral of lower expectations of employment and decent labour conditions and reduced power to demand them.

Macroeconomists in the 1970s figured out the workings of the wage-price upwards spiral which capital wanted to end. The policy answer was to reduce the bargaining power of workers by maintaining a so-called ‘natural rate of unemployment’ and to curtail union power and labour benefits that diminished the threat and risk of unemployment. This could be called a working conditions and employment – union power downward spiral. When capital was committed to ending the wage – price spiral, they worked out what action to take against it.

Unions so far have not worked out a platform around which to mobilise working Australians to reverse the working conditions and employment – union power downward spiral. There’s no end in sight.



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