The Harvard historian Niall Ferguson has landed another punch in his long standing fixture with Nobel Laureate Paul Krugman. Ferguson has said that the British election vindicated the deficit reduction strategy of Chancellor Osborne, and belief in the confidence fairy taunted by Keynesians. Three points come to mind on this debate.
One, is it so difficult to concede that at a macro level, aggregate demand is necessary to generate growth and employment. But at a micro level, households and firms can have Riccardian expectations, holding that untaxed expenditure will evantually have to be taxed. And therefore not responding to untaxed stimulii. What comes out in the macro wash is what we still have to figure out and model.
Two, more flexible contracts introduced with the crisis, may be nudging unemployment down, but with very weak wages, increase in the wage bill has also been muted. Hence aggregate demand still remains weak, even in the UK. This also explains the puzzle of declining productivity in the UK, raised by FT's Martin Wolf. The new jobs added have simply not been that productive, or remunerative. Can the UK strategy work for Europe. I would rather pin my hopes on the ECB's Mario Draghi's QE, to provide demand for more productive and more remunerative jobs. What is the lesson for Chancellor Osborne? More stimulus on the demand side for a more sustained recovery. Rather than just making lower wage jobs available which will generate a more anemic increase in demand.
The argument of course comes down to a wage employment tradeoff. Given a crisis, can employment be maintained with wage rigidity. Or should wages be eased through flexibilisation, and jobs saved. On the face of it, economic logic would argue that better a job on a lower wage, than no job at all. But this is a purely labour market solution to a macro problem stretching across mutiple markets, for capital, output, and exports. It is incorrect and inequitous that the labour market should bear the brunt of an adjustment in general equilibrium. The policy response has to be a macro response, based on aggreagte demand, as well a labour market response to improve supply of labour, and a capital market response to improve supply of credit for the real economy.
The ILO has just released its flagship World Employment Social Outlook for 2015: The Changing Nature of Jobs. It marshalls evidence on the weakening of the standard employment model, ie. erosion of the prevalent notion of the registered-permenant-full time-wage employee. The weaker wage and social protection conditions may have both longer term more secular causes and shorter term more cyclical causes, and have probably contributed to an estimated $3 trillion weakness in aggregate demand. Policy then has to address the weaknesses in these emerging contractual conditions.
The links to the report:
Link to the webpage
http://www.ilo.org/global/research/global-reports/weso/2015-changing-nature-of-jobs/lang--en/index.htm
Direct link to the report in pdf
http://www.ilo.org/wcmsp5/groups/public/---dgreports/---dcomm/---publ/documents/publication/wcms_368626.pdf
Moazam Mahmood
Deputy Director
Research Department ILO
Bureau 8-36
4 Route des Morillons
CH-1211 Geneve 22
One, is it so difficult to concede that at a macro level, aggregate demand is necessary to generate growth and employment. But at a micro level, households and firms can have Riccardian expectations, holding that untaxed expenditure will evantually have to be taxed. And therefore not responding to untaxed stimulii. What comes out in the macro wash is what we still have to figure out and model.
Two, more flexible contracts introduced with the crisis, may be nudging unemployment down, but with very weak wages, increase in the wage bill has also been muted. Hence aggregate demand still remains weak, even in the UK. This also explains the puzzle of declining productivity in the UK, raised by FT's Martin Wolf. The new jobs added have simply not been that productive, or remunerative. Can the UK strategy work for Europe. I would rather pin my hopes on the ECB's Mario Draghi's QE, to provide demand for more productive and more remunerative jobs. What is the lesson for Chancellor Osborne? More stimulus on the demand side for a more sustained recovery. Rather than just making lower wage jobs available which will generate a more anemic increase in demand.
The argument of course comes down to a wage employment tradeoff. Given a crisis, can employment be maintained with wage rigidity. Or should wages be eased through flexibilisation, and jobs saved. On the face of it, economic logic would argue that better a job on a lower wage, than no job at all. But this is a purely labour market solution to a macro problem stretching across mutiple markets, for capital, output, and exports. It is incorrect and inequitous that the labour market should bear the brunt of an adjustment in general equilibrium. The policy response has to be a macro response, based on aggreagte demand, as well a labour market response to improve supply of labour, and a capital market response to improve supply of credit for the real economy.
The ILO has just released its flagship World Employment Social Outlook for 2015: The Changing Nature of Jobs. It marshalls evidence on the weakening of the standard employment model, ie. erosion of the prevalent notion of the registered-permenant-full time-wage employee. The weaker wage and social protection conditions may have both longer term more secular causes and shorter term more cyclical causes, and have probably contributed to an estimated $3 trillion weakness in aggregate demand. Policy then has to address the weaknesses in these emerging contractual conditions.
The links to the report:
Link to the webpage
http://www.ilo.org/global/research/global-reports/weso/2015-changing-nature-of-jobs/lang--en/index.htm
Direct link to the report in pdf
http://www.ilo.org/wcmsp5/groups/public/---dgreports/---dcomm/---publ/documents/publication/wcms_368626.pdf
Moazam Mahmood
Deputy Director
Research Department ILO
Bureau 8-36
4 Route des Morillons
CH-1211 Geneve 22
