How unemployment has been considered by mainstream macroeconomic models?

From the 1950s onwards, the macroeconomic models of the neoclassical synthesis, based a system of simultaneous equations, focused on the interaction between the market for goods and services and the money market in the context of a general equilibrium analysis. According to John Hicks (1904-1989),  in the general case, the capitalist economy is at full employment level of output.  The underlying employment theory is based on the demand and supply of labour in a competitive market. In fact, this neoclassical approach supposes that price adjustment market mechanisms could guarantee full employment.  In same specific cases, however, the general equilibrium implied by the IS-LM model could not necessarily correspond to a full employment level of output. This situation, called unemployment equilibrium, would be the result of market imperfections, such as rigid money wages, interest-inelastic investment demand, income-inelastic money demand, among others.

In the 1960s, mainstream macroeconomic models expanded the analysis of the negative correlation  between  inflation and unemployment. This correlation was  based on the conclusions drawn from an empirical study  -the Philips curve- about the negative relationship between the evolution of the rate of employment and the rate of variation of nominal wages in England at the turn of the 20th century.  The attempt to incorporate the Phillips curve (trade-off between inflation and unemployment) in the analysis of the labour market dynamics turned out to  put emphasis on the role of nominal wages in determining prices, and ultimately, on the demands of workers that put pressure on inflation.

As a matter of fact, since the late 1960s,  the economic scenario of inflation and unemployment in the OECD countries enhanced the spread of the ideas of Milton Friedman, who proposed new monetary policy suggestions founded on the acceptance of the short run trade-off between inflation and  unemployment. After a period of expansionary monetary policy, as businessmen and workers calculate future prices and wages after considering the information they have at present, the rise in the short-run levels of inflation would be reinforced by higher inflationary expectations  and higher nominal wages and prices. For Friedman, expectations are adaptive and, in the long run, the trade-off between unemployment and inflation does not exist. In practice, the promotion of price stability could require a higher level of unemployment in the short-run. In the long-run,  unemployment would be stuck at its natural level.

The Monetarist school of economics eventually made its way into the neoliberal policies of Reagan and Thatcher and formed the core of the proposals of the economists that defend the Washington Consensus agenda. Since these economists have been much more concerned with the effects of inflation on the economy, the economic policy recommendations that priviledge the inflation targeting takes for granted the existence of a natural level of unemployment, the so called non-accelerating inflation rate of unemployment (NAIRU).

 

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10 comments
  1. David Chester said:

    A model of our macroeconomics system does not necessarily need to include unemployment which is subsidiary to the main flows of labor and the other 2 Smithian factors or production. One can add a term showing how the demand for labor changes and by subtracting from it the total available so obtain the numbers unemployed, but this is secondary to the way the main part of the system works.

    • David, the point is the system doesn’t work, with unemployment in its own set of simultaneous equations or included in the general set of simultaneous equations. To believe the economy can be reduced to simultaneous equations or even second order differential equations is the problem not a solution. The abuse of mathematics by economists and other social scientists is often a source of amusement at math conferences. Real fun.

      • David Chester said:

        Ken, you can poke fun at the difficulties for representational macroeconomics models to include unemployment, but without having studied my model and seen how to expand it to cover a spectrum of differently paid employees including those who are unpaid and unemployed, you have no real basis for your fun-making. Good modeling is not easy but it is possible with sufficient care and patience, which you and many others seem to lack.

      • David, I’m not poking fun at the difficulties for representational macroeconomics models, or any other models for that matter. I’ve worked with all sorts of models mathematical, actant, representational (direct and indirect) for over 40 years. My point is that none of the models work. They were never intended to “work.” They are simply tools to help jog our creativity and exploration into the world around us. They don’t give answers, only inspiration (not always useful or correct) and some little cohesion in our work. I’ve also been a mathematician for those same years, and the amusement of mathematicians at social scientists’ use of mathematics is actual. Though I admit mathematicians abuse mathematics also.

      • David Chester said:

        The generalization about failure of models to work properly does not necessarily apply to ALL models. My model has the means (due to its matrix application) to be expanded to include any spectrum range of many parts of our society. That includes the degree or intensity of employment and the end of the range where there is none.

  2. Jesper Jespersen said:

    Ken, could you give one or two references to such contributions making fun of the use of math in social sciences (and of course especially in macroeconomics). Thank you

    • Jokes like I mentioned are generally only shared personally among mathematicians at professional meetings. They don’t publish them in journal articles or professional books. But two of my teachers, Philip J. Davis and Reuben Hersh did write two books that take a lighter view of mathematics and its use and misuse. The books are Descartes’ Dream: The World According to Mathematics and The Mathematical Experience. Also, take a look at Hersh’s What is Mathematics, Really? for an overview of just how mathematicians see mathematics, including applied mathematics. There are too many “serious” articles by mathematicians about its misuse by social scientists to list here. Hope this helps.

  3. This is hubris speaking. Scientists, historians, artists, etc. study the world and then construct representations of the what they’ve found. But these are only representations, not the world. Sometimes the representations prove useful, sometimes not. So model building is a primary human skill. Humans work hard at it. All human knowing is in this form – models. As I’ve said, the models may guide us and inspire us. They can be judged pragmatically, but not in terms of truth. If you’re using “work” in that sense, then some models do work.

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