October 13, 2016

NAIRU ― a folk psychological hallucination

Comment on Simon Wren-Lewis on ‘Did the Bank of England cause Brexit?’


Simon Wren-Lewis argues with regard to the UK labor market: “It would mean what economists call the natural rate of unemployment (or NAIRU) has fallen. Unemployment can be lower without leading to wage increases that threaten the inflation target, because workers fear that the employer can resort to finding much cheaper overseas labour.”

Clearly, this is a psychological argument about what might go on in the heads of workers and employers and, clearly, the speculation about the inner workings of other peoples’ minds can go on until everybody is blue in the face without ever reaching an empirically testable conclusion. Folk psychology and behavioral speculation is simply the wrong way to tackle the employment problem. There is NO such thing as a NAIRU.*

The fact of the matter is that employment is OBJECTIVELY determined by the structural employment equation which consists of measurable variables and is absolutely FREE of folk psychological assumptions. The basic version of the SYSTEMIC employment equation is reproduced on Wikimedia.

The bottom-line of the employment equation is that overall employment (in the world economy) INCREASES if the average wage rate W  INCREASES relative to average price P and productivity R. This is the OPPOSITE of what folk psychological labor market theory has always preached, and this goes a long way to explain why economists ― and NOT the Bank of England ― are the ultimate cause of unemployment/deflation/depression.**

Egmont Kakarot-Handtke

* See paper ‘Keynes’ Employment Function and the Gratuitous Phillips Curve Disaster
** See post ‘The very serious blunders of very serious people