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Irwin Kellner: Throw out that NAIRU
NEW YORK (CBS.MW) — Let’s see, now. The unemployment rate in March fell to its lowest level in almost 30 years. At the same time, the Employment Cost Index, the government’s broadest measure of labor costs, rose in the first quarter at the slowest pace on record. And in March, the Consumer Price Index rose just 0.2 percent, bringing the first quarter’s rate of rise to only 1.5 percent. This is not supposed to be the way the world works, according to those who believe in NAIRU, the non-accelerating inflation rate of unemployment. But like its Nehru jacket namesake of the past, NAIRU is out of date as well. This is because the trade-off between inflation and unemployment is not static, but dynamic. In other words, just because a certain rate of unemployment in the past might have triggered a jump in wage rates doesn’t mean that reaching that same level today (or in the future) will necessarily do the same. And since labor costs are two-thirds of total business costs, this means that the economy can continue to grow at a good clip without inflation heating up. If inflation stays low, the Fed will keep its finger off the interest rate trigger while bond yields should come down. Both would be good for the stock market—which, in turn, will keep the economy humming. Why the shift in this so-called trade-off? For one thing, many workers are still worried about job security—not unreasonable, in view of the number of layoffs announced almost daily. The Labor Dept.’s quit rate (the percentage of those who are unemployed because they left their job voluntarily, thus a sign of worker confidence), is far lower today than it was the last time the jobless rate was this low. Another factor behind the changing trade-off is the low rate of inflation, itself. First, it reduces cost-of-living increases in labor contracts. Second, it means that even with smaller increases in wages and salaries, workers can enjoy increased buying power—which is really the bottom line to most people. Besides the tiny rise in compensation, the rate of inflation is also being held in check because of the massive investments business has made in technology. Whatever increases in wages and salaries do slip through are being offset by gains in productivity, keeping labor costs per unit of output from growing—and that’s the bottom line for business. As long as this virtuous cycle remains intact, there’s no telling how low the unemployment rate can go before wage rates accelerate. So forget about NAIRU and enjoy the real world of low unemployment and low inflation. Dr. Irwin Kellner, chief economist of CBS MarketWatch, is Weller professor of economics at Hofstra University. |