I was sorry to miss a celebration of the life and work of Ian Stewart organized by the Centre for the Study of Living Standards last Friday night. Ian was a former senior economic official back in the now distant days of Keynesian dominance, including a stint as Deputy Minister of Finance which will be forever associated with the introduction of the most progressive tax reform in Canadian history.
In honour of Ian’s contribution, the Centre has published a festschrift , all of the papers in which seem to merit a read. I would judge that one of the closest to Ian’s values and concerns is a paper by Lars Osberg, “Why Did Unemployment Disappear from Official Macro-Economic Discourse in Canada?”
Lars begins by noting the stagnation of hourly wages and median household incomes since the mid to late 1990s, when there was an important shift in the emphasis of macro policy from unemployment to inflation. He shows that unemployment became relegated to clearly secondary status as a priority,Â contrasting at least a bit to the US where the formal mandate of the US Federal Reserve covers both.Â He argues that unemployment has been relatively high since the break point in policy, especially taking into account the much greater “flexibility” of the job market.
In line with many other critics of the NAIRU concept – the idea that there is an unemployment rate above which inflation will rise and indeed accelerate – Lars argues that a single-minded focus on inflation leads to unnecessarily high unemployment. Setting a firm inflation target with no unemployment target predisposes fiscal and monetary policy towards unduly conservative policy so as to minimize the risk of exceeding the former.
What I found most important and interesting about the paper is the argument that NAIRU is a “thick line” and that a rather wide RANGEÂ of unemployment rates may be consistent with stable inflation. If this is true, and Lars marshalls a lot of evidence, there will almost always be a significant and ongoing cost attached to minimizing inflation risk as opposed to balancing inflation and unemployment risk. That cost is to be countedÂ in terms of lower output, and also lower potential output. Lars also emphasizes the very real human costs of unemployment as identified in recent research on happiness and well-being.
Lars also notes that very little attention in Canada has been paid to gathering job vacancy data, which would allow for much easier identification of structural unemployment which could be remedied through active labour market policies.
All in all, a contribution which is well worth a read.