Transcript Economic Development and Unemployment: Do They Connect?

Unemployment
in Economic Theory
Lecture
by
Persefoni Tsaliki
Department of Economics
Aristotle University of Thessaloniki
Perspectives on the Euro(crisis)
Sharing Perspectives Foundation
October 2013
Unemployment
•
The most striking developmental phenomenon in western
economies is the lasting unemployment
•
In mainstream literature, unemployment is principally
attributed to labor market rigidities
•
In Keynesian tradition, unemployment is due to lack of
effective demand
•
The theoretical and empirical studies with respect to
employment have reached over the years contradictory and
inconclusive results.
•
In the present lecture we will argue that unemployment is a
systemic element of the normal operation of the labour
market.
The presentation is a summary of the following articles:
•
“Technical Change, Unemployment and Labour Skills”
International Journal of Social Economics, 38, 7, 2011 (Pavlidou, Vardalachakis and Tsaliki)
•
“Unemployment Revisited: Empirical Evidence from Twenty OECD
Countries”
Contributions to Political Economy, 28, 1, 2009 (Alexiou and Tsaliki)
•
“Economic Development and Unemployment: Do They Connect?”
International Journal of Social Economics, 36, 7, 2009 (Tsaliki)
•
“Competing Theories of Unemployment and Economic Policies:
Evidence from the US, Swedish and German Economies”
The Indian Economic Journal, 56, 3, 2008 (Katrakilidis and Tsaliki)
•
“Economic Development, Human Capital and Technical Change: The
Question of Machinery Revisited”
International Review of Economics, 55, 3, 2008 (Tsaliki)
The ‘specter’ of unemployment in
developed economies
•
Unemployment categories in economic textbooks: seasonal, frictional, structural and cyclical.
•
The first three categories are considered normal and acceptable inasmuch they are viewed
as the by-products of the normal operation of the labor market.
•
Only cyclical unemployment is viewed as a deviation from the normal and so Keynesian
economics suggest countercyclical economic policies to minimize, if not eliminate, this kind
of unemployment.
•
In late 1960s economies entered a prolonged period of recession with the simultaneous
occurrence of inflation and unemployment (stagflation) which could not be explained and, of
course, cured within Keynesian economics.
•
Thus alternative approaches (monetarism, supply side economics, new-classical economics,
etc.) rooted in mainstream economics arose in an attempt to interpret stagflation.
•
Meanwhile, unemployment continued to be high in the developed economies even in the
1990s, a period characterized by high growth rates.
Theoretical approaches to unemployment:
neoclassical view
•
Unemployment can only be temporary. With no obstacles in the labour market, variations in
the real wage soon restore full employment of labour.
•
Real wage designates the market clearing price which is governed solely by technology and
household preferences
•
Thus, unemployment can only be voluntary and as such does not present any significant
problem requiring government policy.
•
The equilibrium in labour market and the determination of real wage are independent of
social forces (unions, government, etc.). If, however, such forces exist disequilibrium in the
market may arise.
•
Unemployment is the result of ‘stickiness’ and inefficiencies in the labour market caused by
powerful labour unions, government interventions and the like.
•
From this perspective, persistent unemployment is attributed to labour market rigidities which
together with poor education, lack of motivation and insufficient information about available
vacancies make unemployment to persist (Pissarides, 1985; Mortensen, 1986; Blanchard
and Summers, 1987; Layard, et al., 1994).
•
The current practice of economic policy particularly in the USA and EU countries is based on
this theoretical framework with a heavy reliance upon monetary policies whose objective is
the control of inflation allowing no room for an explicit employment policy (Grahl, 1997;
Grieve-Smith, 1994).
Theoretical approaches to unemployment:
‘natural rate of unemployment’ and NAIRU
•
The idea of the ‘natural rate of unemployment’ supplements the above analysis for it is
viewed as the minimum unemployment level consistent with market clearing conditions in the
labour market.
•
As a result, the economic policy has been heavily influenced by the perception that low
levels of unemployment will cause inflation to accelerate. Hence, no room for an active
employment policy, since it will interfere with market functioning.
•
Any effort to lower the existing ‘natural rate’ of joblessness would trigger inflationary wage
and price pressures which is foundation of the well known non-accelerated inflation rate of
unemployment (NAIRU) argument.
•
According to NAIRU approach, wage-push variables are crucial in explaining the rise in
unemployment and within this context, most of the policies designed to combat this problem
focus on the necessary labour market reforms.
–
–
•
“the specter of unemployment that is haunting Europe will not be exorcised unless governments are
prepared to undertake major reforms of the institutional set up of the labor market” (Siebert, 1997: 53)
“that the generosity of Europe’s welfare states is in some sense responsible for the rise in their
unemployment rates” (Krugman, 1994: 57)
The pertinent economic (empirical) literature is not supportive at all to the view that labour
market rigidities are the primary cause of unemployment and to the idea that the
deregulation of national labour markets will increase the level of employment (Howell, 2005; Baker
et al., 2003).
•
Nevertheless the concept of natural rate of unemployment remains popular among
economists and policy makers, despite of criticisms even from mainstream economists
et al., 2000).
(Henry,
Theoretical approaches to unemployment:
Keynesian view
•
The Keynesian approach to unemployment, at first sight, appears to be
different from the neoclassical. A closer inspection, however, reveals that
both approaches share the view that unemployment is the result of the
malfunction of the labour market.
–
–
•
Neoclassical: unemployment is the result of a malfunction in labour market
Keynesians: unemployment is the result of inefficient effective demand
The NAIRU falls within the idea that a proper policy mix can achieve the
desired result of full employment
The goal to full employment has been just redefined not necessarily according to the
number of unemployed but rather according to whether or not the existing level of
unemployment accelerates or decelerates the inflation rate.
•
NAIRU is a Keynesian devise and ‘full employment’ is viewed as an
attainable and at the same time desired objective.
•
Mainstream and Keynesian approaches share that social forces play no
role in determining the level of employment in the system.
Theoretical approaches to unemployment:
Classical/Marxian approach
•
The mechanism that regulates the dynamics of capitalism is competition which is
envisioned as a turbulent and a war-like process.
•
Capital fights mainly in two fronts:
–
–
in the labour market to reduce unit cost
in the product market to gain market share
•
The most effective way for capital to keep wages low and increase productivity is
through the mechanization of the labour process which is achieved with the
introduction of fixed capital.
•
The survival of individual capital in this turbulent and inherently violent process
requires not only a rising mechanization of the production process but also the full
utilization of capital. Because, idle machines signify lost opportunities for
producing more profits.
•
The displacement of labour by machines increases productivity, lowers unit cost
and enhances profits.
•
Hence, the replacement of labour by capital is not only a stylized fact of the
process of economic development but it is also, to a certain extent, a desired
outcome of this process i.e., the reserve army of the unemployed
An Alternative View on Unemployment: the reserve army argument
•
The dynamics of capital accumulation and economic development regulate the supply and
demand for labor in such a way as to ensure that an excess supply of laborers (or ‘reserve
army’) is constantly reproduced. The labor market is ruled by laws other than those of supply
and demand that regulate the product markets.
•
The continual generation of the reserve army of labor relies on the dynamic interaction of the
following three factors which characterize the developmental features of advanced
economies:
–
–
–
•
changes in the rate of accumulation: its rise increases demand for labor
changes in the capital-labor ratio: incessant need for mechanization of the production process
reduces the demand of labor
changes in the potential working population: deskilling, commodification of life increases the supply of
labor
The rising “reserve army of labor” is not:
–
–
a product of disequilibrium; nor
a dysfunctional outcome of the system that can be eliminated by an appropriate economic policy.
On the contrary, it is an essential component of accumulation because it supplies capital with
a necessary degree of flexibility and a critical mechanism to regulate the wage rate.
“Relative surplus-population is therefore the pivot upon which the law of
demand and supply of labor works” (Marx, 1867: 639)
•
It is interesting to note at this point that some neoclassical economists (i.e., efficiency wage
theorists) argue that a certain percentage of unemployment may work as a necessary
“worker discipline device” in the labor market (Shapiro and Stiglitz, 1984).
Mechanization of the production process
•
1/2
A systemic element prevailing economic growth and development is the massive
introduction of machinery into the production process which simultaneously:
–
–
•
Creates and destroys employment
Advances and deteriorates labor skills
From the empirical point of view, the economic analysis on machinery and its
impact on economic progress focused mainly on the compensation argument, that
is on the various market mechanisms that are triggered by the introduction of
machinery and technological change itself and counterbalance the initial laborsaving impact of innovation (Pianta, 2004).
–
–
–
–
–
•
the production of new machines (Say, 1803) and new investments (Ricardo, 1817; Marshall, 1890)
the increase in incomes (Boyer, 1988)
the decrease in prices (Smonly, 1998)
the fall in wages (Davis, 1998; Addison and Texeira, 2001)
the introduction of new products (Vivarelli and Pianta, 2000).
These studies have shown that technological change may induce market forces
which can potentially counterbalance the initial labor-saving effect, but all these
compensation mechanisms can be also hindered by the existence of drawbacks
which are often neglected (Vivarelli, 2007). For instance,
–
–
Pianta (2000) and Antonucci and Pianta (2002) found an overall negative employment impact of technological change
in manufacturing industries across five European countries,
Evangelista (2000) and Evangelista and Savona (2002) found a positive employment relationship in the most
innovative and knowledge-intensive service sectors and a negative one in the case of finance-related sectors and
most traditional service sectors like trade and transport.
Mechanization of the production process
2/2
Why entrepreneurs introduce machinery?
–
–
–
the need for higher labor productivity.
rising labor productivity becomes the condition sine qua non for the survival of the firm
basic trend of capital accumulation is the introduction of progressively sophisticated machinery which,
reduces unit cost, expands production to higher scale and eventually transforms previously luxury
goods into goods of mass production and subsequently into goods of mass consumption.
The incessant introduction of machinery transforms the nature of the labor process
–
–
–
–
–
–
–
Intensifies work; technology is particularly effective in getting workers to work more intensively during
their working day.
Introduces methods that further promote the division and specialization of labor
promotes work rationalization which serve to simplify and standardize work so that it can be done in
the least amount of time at the lowest possible cost to business, etc.
since the function of machinery is responsible for all essential decisions in the production process,
many skills are removed from workers who are bound to perform more repetitive tasks at a more
productive rate.
Labor is, in this way, further subdivided and therefore it is de-skilled even more.
the subsumption of labor to capital takes place since workers become subsumed to the operation of
machine rather than the other way around (Marx, 1967; Braverman, 1998).
a new technology which is finally rationalized and prepared for mass production takes away the skills
of a great deal of workers;
mechanization and de-skilling are the logical consequences of capital’s need
to increase labor productivity
–
–
there is no perfectly linear descent of skill levels of the labor force as new technologies may also
raise the skill level of certain groups of specialized laborers;
the new skills sooner rather than later are simplified and acquired by the majority of labourers.
Reserve army (unemployment)
–
–
Source: the massive introduction of machines in the production process
Cause: competition
Core Models of Unemployment
Neoclassical/NAIRU model: Ui = ƒ[ Xi+, Pi-, Zi]
Keynesian Model:
Ui = ƒ[Di-, Zi]
Classical/Marxian model:
Ui = ƒ[ Ki-, ki+, Li+, Zi]
Empirical Evidence for Core Models of Unemployment
Germany
USA
Sweden
Model 1
Model 2
Model 3
Model 1
Model 2
Model 3
Model 1
Model 2
Model 3
BRR
-1.24
(0.85)
-
-
-0.39
(0.59)
-
-
-4.53
(0.14)
-
-
CU
-10.73
(0.02)
-7.77
(0.01)
-
-5.71
(0.01)
-13.41
(0.02)
-
-23.31
(0.03)
-9.72
(0.080)
-
Y
-
4.12
(0.07)
-
-
-20.16
(0.05)
-
-
-61.41
(0.03)
-
K
-
-
-4.27
(0.01)
-
-
-1.05
(0.01)
-
-
-21.49
(0.01)
k
-
-
5.38
(0.00)
-
-
1.84
(0.01)
-
-
6.44
(0.02)
L
-
-
9.22
(0.18)
-
-
8.59
(0.00)
-
-
1.82
(0.62)
P
2.62
(0.02)
-2.52
(0.36)
2.53
(0.00)
-0.14
(0.62)
1.52
(0.00)
-6.07
(0.00)
0.01
(0.99)
10.38
(0.10)
-5.86
(0.04)
LABC
-8.26
(0.11)
-5.26
(0.17)
6.94
(0.21)
-2.39
(0.41)
7.09
(0.14)
8.71
(0.01)
-5.35
(0.28)
202.18
(0.10)
27.67
(0.16)
c
21.47
(0.59)
1.22
(0.69)
39.70
(0.02)
81.24
(0.00)
7.58
(0.12)
60.60
(0.00)
4.61
(0.88)
75.16
(0.01)
403.81
(0.01)
t
-
-
-
-
-
-
-0.13
(0.64)
0.49
(0.12)
0.69
(0.04)
Conclusions of the Empirical Results
1.
Neoclassical/NAIRU core model: The variable Benefit Replacement Ratio is
not statistically significant
2.
Keynesian core model: the growth of effective demand and the degree of
capacity utilization are statistically significant in all three countries.
3.
Classical/Marxian core model: capital stock and capital-labour ratio are
statistically significant in all three countries.
4.
The empirical analysis is in sharp contrast to the view that the presence of
labour market rigidities bears responsibility for the high unemployment rate
and to the policy conclusion according to which countries with considerable
unemployment figures should undertake structural reforms in order to free
labour market from alleged rigidities
5.
Growth dynamics of an economy may constitute the main causes of
unemployment and not necessarily the structure of labour market. Hence,
these findings may give rise to an altogether different perspective to the
problem of unemployment and may suggest different policy proposals whose
emphasis will be on the dynamics of capital accumulation in combination with
demand forces and will not focus solely on establishing an unrestricted labour
market.
Thank you for your time
and attention