Cooking the Books: Who, where or what is NAIRU? (2019)

The Cooking the Books column from the September 2019 issue of the Socialist Standard

‘Having a constant pool of unemployed workers is deliberate policy’, was the headline of an article by Van Badham in the Guardian (26 July) with the subheading ‘The purpose is to maintain an economy for the benefit of the rich under the pretext of fighting inflation.’ She referenced an article on the website of the Reserve Bank of Australia on ‘Estimating the NAIRU and the Unemployment Gap’.

NAIRU, what’s that? The article explained:

 ‘The NAIRU – or non-accelerating inflation rate of unemployment – is a benchmark for assessing the degree of spare capacity and inflationary pressures in the labour market. When the observed unemployment rate is below the NAIRU, conditions in the labour market are tight and there will be upward pressure on wage growth and inflation’ (LINK).

The assumption here – and that’s what’s wrong with the theory – is that it is wage increases that cause inflation as the rise in the general price level, i.e. of all prices. Wages in general and inflation do move in line, but this is only because wages are a price, of people’s working skills, and as such rise with all other prices when there is inflation.

That wage increases cause other prices to rise is a fallacy that socialists have long had to deal with, going back to Marx’s talk to English trade unionists in 1865, later published as the pamphlet Value, Price and Profit. Basically, an increase in wages, if it can be imposed, will be at the expense of profits. That employers could recover this by increasing the price of their products assumes that they are not already charging what the market will bear, which would be stupid of them. If, on the other hand, they are charging this they cannot increase the price as this would reduce their sales. They are obliged to take a hit on their profits.

As the word itself implies, ‘inflation’ is an over-issue of a currency, which results in each currency unit coming to be depreciated and so producing a rise in the price of all goods. It has been practised by all governments since the end of the last world war. They blamed the resulting rise in the general price level on workers obtaining wage increases and sought to protect these eating into profits through ‘incomes policies’, ‘pay pauses’ and ‘wage freezes’.

After the 1970s these policies were abandoned, largely because it was unnecessary as the end of the post-war boom led to an increase in unemployment which itself restrained wages. The ideology that wage increases cause inflation, however, was not abandoned. Keynes’s successor as chief capitalist economist, Milton Friedman, proclaimed that the rate of unemployment that resulted in no inflation was the ‘natural’ one. As governments hadn’t entirely abandoned inflation as a policy but aimed to maintain it at about 2 percent a year, the name was changed to ‘non-accelerating’ rate as the one that would keep inflation at this level.

Badham is right that governments are maintaining ‘an economy for the benefit of the rich under the pretext of fighting inflation’ but they don’t create unemployment as a deliberate policy; that would imply that they could avoid it, which they can’t. It is just something they accept and justify by theories such as NAIRU. It is also completely cynical and hypocritical since, at the same time that they are hounding the unemployed to find a job and reducing their dole to encourage this, they are accepting that many won’t, even shouldn’t find a job (the Reserve Bank of Australia says this should be 5 percent of the labour force),