Do full employment and the natural rate of unemployment mean anything any more?

One of the features of economics in the pre credit crunch era was confidence about concepts concerning the labour market. We had the concept of full employment which is defined below from the Financial Times lexicon.

When labour supply and demand in an economy are balanced at market wages. This does not mean everybody in the labour force is employed (see frictional unemployment) but in theory, it is the highest possible level of employment in a market economy.

It is hard not to have a wry smile at the way that full employment does not mean full (100%) employment. A bit like the way many central bankers define “price stability” as an inflation rate of 2% per annum. But we have an allowance for people changing jobs ( frictional unemployment)  and often an allowance for a mismatch between skills and jobs which is called structural unemployment.

In terms of numbers here are some estimates. From the BBC.

William Beveridge, the man who inspired Britain’s post-war welfare state, said full employment meant a figure of under 3%.

Other estimates tended to be higher than this and William T Dickens did some work in the US which estimated it as being around 5% in the pre credit crunch period. Also Mr. Dickens added quite a bit to the debate by publishing a graph showing that his work had a lower bound of 2% and an upper bound of 7%. That narrows it down.

Also the definition had shifted somewhat as the phase full employment became pretty much interchangeable with the cumbersome phrase the non-accelerating inflation rate of unemployment or NAIRU. Estimates of this I saw pre credit crunch tended to be of the order of 4.5% for the unemployment rate.

A modern challenge

This comes as so often in the modern era from Japan where the Statistics Bureau has reported this today.

  The unemployment rate, seasonally adjusted, was 3.0%.

So below the natural rate and now in the full employment zone? We can see what is on the quantity measures an improving situation.

The number of employed persons in July 2016 was 64.79 million, an increase of 980 thousand or 1.5% from the previous year……. The number of unemployed persons in July 2016 was 2.03 million, a decrease of 190 thousand or 8.6% from the previous year.

As you can see unemployment is on the edge of two thresholds here as we wonder if it will dip below 2 million and the rate fall below 3%. A rising employment situation is also strong when we remind ourselves that the population is shrinking although some care is needed as we are given numbers for the labour force which are amazingly constant.. If we dig deeper we see that those who have involuntary employment are a relatively mere 540,000, is that structural unemployment? Even youth unemployment ( 15-24) is a lowly 4.7%.

Why aren’t wages rising quickly?

A problem for the theorists in their ivory towers has been the behaviour of wages in Japan. They should be rising strongly as we have passed the NAIRU but they continue to struggle. Indeed figures for workers households today hint at possible moves in the opposite direction.

The average of monthly income per household stood at 574,227 yen, down 2.2% in nominal terms and down 1.8% in real terms from the previous year….  The average of consumption expenditures per household was 302,422 yen, down 3.9% in nominal terms and down 3.5% in real terms from the previous year.

Employment is not what it used to be

There has been a structural change in employment in Japan over time. Back in September 2014 Fathom Consulting told us this.

Since the depths of Japan’s economic crisis in the late 1990s there has been a marked switch away from full-time into part-time work. The old ‘job-for-life’ culture is just that…….There are more people now working part-time in Japan who would rather work full-time than there are unemployed people. On that basis Japan has a much larger ‘underemployment’ problem than either the US or the UK.

If we look at the latest data we see that there are 33.57 million regular employees in Japan and 20.25 million irregular employees. If we switch to hours worked per month we see that regular employees get 188 of them but for irregular employees get a much lower 120.

The wages situation is rather divergent too as Japan Macro Advisers point out. There was good news for salarymen and women.

The regular (basic and overtime) part of wages was flat, only up by 0%, but the bumper bonus, up by 3.6%, pushed up the overall paycheck in June. It is going to be a good summer for all those army or loyal company men (and women) in Japan.

But not so good news for others.

The talk of good summer bonus must be a pain for irregular workers in Japan though. Over 1/3 of employment in Japan are irregular workers, and most of them are not eligible for bonuses. In June, wages of part time workers were only up by 0.4% year on year, compared with 1.5% year on year rise for full time workers.

The number of regular jobs was falling but that has changed albeit marginally as 19,000 have been created over the last year. However we found ourselves looking at irregular jobs for the majority of jobs growth.

A difference in the sexes

The situation for Japanese women has been lauded as a success for Abenomics and employment has risen from 23.24 million in 2013 to 24.57 million in July of this year. However proportionately much more women are irregular workers with 13.79 million of them now and 830,000 of the employment growth just discussed being in that category.

Now there are issues here as to type of work and perhaps some would only want part-time work which is more likely to be in the irregular category but we also have to face up to the fact that a difference between treatment of the sexes may well be a feature of the new Japanese employment structure.

What is life like for an irregular employee?

Back in March 2015 the Wall Street Journal gave us some insight.

Mr. Kinoshita is a member of Japan’s large and growing army of so-called nonregular workers—temporary, often part-time employees who are usually paid less than their “regular” counterparts. Like many of them, the 49-year-old Mr. Kinoshita has been unable to find permanent employment for years and struggles to make ends meet, despite working nearly full time. His new job pays ¥1,000 ($8.25) an hour, well below the ¥1,400 he earned in his last position at an auto-parts maker.

Oh and he does not seem to be too keen on plans to raise the inflation rate.

Everything is expensive,” he said. “A bag of tangerines costs ¥400.”

How can things be expensive in a place that has not had any inflation for years and indeed decades?

Comment

The example of Japan shows us that Ivory Tower concepts of full or natural rates of employment are full of more holes than a piece of Swiss cheese. For a start they completely miss the concept of underemployment. Then they fail to allow for the trend towards newer jobs being on worse terms than established ones. This is not only in wages but in hours worked and conditions.

If we move geographically away from Japan we have seen similar effects at play in other countries where the unemployment rate has fallen such as the US and UK. The obvious signal is the way that wage growth has been slow with levels of unemployment at what was considered to be the natural rate level and in some cases below it. The UK ONS has done work which suggests that like in Japan wage growth has been held back by the fact that newer jobs have been at lower wages. Also we note that in the UK wages for younger workers have been disproportionately affected which is exactly the opposite of where we should be now.

Of course we also need to allow for the fact that the information we get is much less than some would claim. There are wide margins of error in the two US labour market surveys which frequently contradict each other. In the UK we know so little about what is happening in the growing self-employment sector and know almost nothing about their wages.

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18 thoughts on “Do full employment and the natural rate of unemployment mean anything any more?

  1. Really interesting blog today, Shaun. Ivory Towers indeed.
    I have been wondering for some time whether there is a different equilibrium in the UK from the old NAIRU measure that you mention. NAIRU seems to be based on the concept of a stable population producing the workforce, which is no longer true. I know that you don’t do politics ( a good thing!), but I do believe that immigration is perhaps producing a new equilibrium. I was talking to an MP who said that, in his constituency, 800 British workers earned £12 an hour some years ago in a local pig factory. Now, there are only 50 local workers (rest are from Eastern Europe) and they all earn the minimum wage (£7.20) an hour. The British workers have found other jobs paying more than the minimum wage, but nowhere near £12 an hour.
    It strikes me that this may be happening on a bigger scale, i.e. so long as the wages in this country are attractive to foreigners, you can keep driving down unemployment or increasing employment without lifting wages, as employers will simply take on the cheaper workers from the larger pool. So long as immigrants will work for less, in other words, then wages will not rise even if employment does.
    It would be fascinating to be able to study such a relationship, but I would guess that any such study would be overwhelmed by political point-scoring of one sort or another!

    • Your example won’t reduce unemployment numbers but would produce a technical percentage reduction. in the unemployment rate

      As more immigrants arrive to undertake low paid work, swelling the work force, the indigenous unemployed whom were already refusing to work at the lower wage rate will remain unemployed, although the total number employed and ultimate work force size will increase in line with new immigrant arrivals, whilst the unemployed number remains static but represents a lower percentage of the new larger workforce ceteris paribus.

  2. Hi Shaun
    Excellent blog. The Japanese numbers tell the story that are being replicated across much of ‘western society’. ‘They’ have no intention of telling ‘us’ what is happening. Its deliberate policy.
    A world of power starvation ( for our own good) , worthless savings, non-existent pensions, hi-tec health services for the 1% minimum provision for the rest, geriatric genocide, non-regular work for the 99%. It used to be the stuff of some ‘blacker’ sci-fi, now its looking more and more likely. And its quite deliberate policy. And because its happening slowly, carefully massaged by continual conditioning through the media, the majority are amost completely oblivious.
    I am tempted to say we need our own Muad’Dib, but besides the current unfortunate connotations , it would always be my preference to find peaceful solutions. Alas the further this develops the less likely that will be an option.

    • I couldn’t agree more on the non-existent pensions. I am in my late fifties and, frankly, when I look at the pension that I will get, I wish now that I’d never bothered to save. Had I put my pension contributions into a second house, I would be far better off.

    • Violence will prove to be the only answer, The dictatorship of the elite will not hand back wealth or power without it.
      Change, if and when it comes, will be bloody.
      Look at what we have seen so far:
      The EU overthrowing the Govts. of Italy and Greece in order that they stay with the programme.
      Ministers of European Govts forcing the Govt of Tsipras to heel by threatening financial meltdown.
      The three neo-Liberal parties, backed by the establishment press of the UK acting as one in both the Scottish and EU referenda.
      Establishment Republicans in the US backing the Establishment Democratic candidate because their own anti-Establishment candidate has been foisted upon them by their own voters.
      Establishment Labour MPs acting to overthrow the duly-elected Labour leader because he’s anti-Establishment.

      It’s not just in economics where, as I stated the other day, the Establishment is at war with its populace, this war reaches into every nook and cranny of life, and IT’S HIGH TIME IT GOT BLOODY.

    • JW your spot on about the media they have executed the blueprint of Goebelles and taken it to another level,the west used to sneer at Eastern Bloc propaganda the sad thing is that a sizeable portion of the population believe what they are told,the facts contradict the media the information is available,yet they choose to ignore it.
      We are being fleeced to keep a doomed monetary and financial system alive just a while longer,the economic policies of the last 3 decades have been catastrophic,however if anyone suggests an alternative they are hit with a media s**t storm…..unelectable.
      Just in case we might get the idea that we should consider an alternative to serfdom.
      Japan makes the policies of the late Lord Sutch seem credible yet instead of the yen being worth less than the Zimbabwean Dollar it refuses to sink,because like the old Soviet economy everything is being manipulated by Central Banks conjuring up trillions of dollars out of thin air….everything is wonderful,nothing to see move along.

  3. “A problem for the theorists in their ivory towers has been the behaviour of wages in Japan. They should be rising strongly as we have passed the NAIRU but they continue to struggle. Indeed figures for workers households today hint at possible moves in the opposite direction.”

    It’s also a cultural thing Shaun. It’s a Japanese company tradition to pay lower wages to older employees (about 50). Given the demographics this is only to be expected.

    • Hi Noo2

      That is something of a trap in the current situation to say the least! You made me look at the trends expected and below is 2015.

      By 2025 the population bulge has passed 50 with an obvious implication unless that relationship changes.

  4. Immigration is being used as a scapegoat. Many Britons and Irish emigrated to the USA, Canada, Australia, New Zealand and so on. Look at the wealthy city states like Singapore and Hong Kong, which were formerly British administered.

    Globalisation and trade increase wealth. Unfortunately the proceeds are not being shared, and the international elite are taking all. Freeloading, tax dodging elite. The ones who stand to lose the most if law and order break down do not pay their fair share for policing and administration costs.

    Democracy is meant to be rule by the people for the people. Unfortunately it isn’t working well most places, Iceland excluded. And the solution is not some snake oil selling politician promising change, it is to reform the governance system and use legally binding referendums with the power to overrule politicians. Power corrupts and politicians should not be given excessive power.

      • It is nice news, but apple is just 1 company. The EU is an ineffective disfunctional organisation, who, like the league of nations cannot deliver. Take Juncker’s Luxembourg, the tax dodgers paradise who insist that Germans driving dirty cash across in Luxembourg banks deserve privacy whilst jailing those who try to whistleblow. London isn’t any better, foreign oligarchs bring in money without effective checking whether it is proceeds of crime or whether tax has been paid on such income. It is unfair that the British middle class pay 40% income tax and VAT etc whilst the elite freeload.

  5. If we are at “full employment” or the “natural unemployment rate”, then that proves that no-one, NO-ONE AT ALL, who is unemployed can be seen as a workshy scrounger, even if he is.
    It also proves unambiguously that DoE is persecuting the unemployed, especially those whose benefits are withheld.

  6. Hi Shaun,

    Another excellent blog.

    Looking at three major Western economies of Japan, UK and US they seem to be caught in a similar debt trap, where combined public, private and corporate debts are around 450-500% of GDP. The UK has gone from about 200% in 1991 to 500% now. ZIRP and NIRP make sense when the cost of servicing can very rapidly lead to a country being insolvent. Borrowers have gained, savers and pensioners have lost With Global labour mobility, there have been more losers than winners. In the past heavily indebted economies, relied on growth to get them out of the mire. Currently, for Japan it is near to zero, for the UK and US, 2-3% is good going.

    ZIRP, NIRP and QE are clearly not working, but the alternatives look even worse, raise interest rates, servicing the debt goes up which is going to impact growth, shares will fall, which will increase percentage earnings, but generate capital losses and the same applies to other assets like housing.

    For politicians and central bankers it seems to be a policy of keep calm and carry on as usual, until the wheels fall off the wagon! Maybe I’m missing something, but apart from rampant inflation or defaulting, how do these countries escape from this financial black hole?

    • Easy, the black hole will disappear when the banks are back in profit, having paid all the fines for misbehaving, exports exceed imports, manufacturing grows faster than services, investment is put into sensible infrastructure and education and pigs grow feathers and start taking off!

  7. Shaun,
    As I understand it prime age male manufacturing workers are unemployed and replaced by part time female workers in Japan thereby flattering the unemployment figures.
    Young Japanese men in their 20s are not marrying partly because they can not afford a family ~ trouble continues for Japan and an example for the rest of us?

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