Okun's Law

captainstacy

If I am given the inflation rate and told the unemployment rate is equal to the natural rate of unemployment how can I find the growth rate without knowing the unemployment rate last year?

later12

Which form of okun's law are you using?

Can you transcribe the full question?

krd

captainstacy wrote: »

If I am given the inflation rate and told the unemployment rate is equal to the natural rate of unemployment how can I find the growth rate without knowing the unemployment rate last year?

In the real world, you can't. But, in the Wacky World of Milton Friedmanite hallucinations, and bendy mirrors, you can.

From Wikipedia.
Okun's law can be stated as saying that for every one percentage point by which the actual unemployment rate exceeds the so-called "natural" rate of unemployment, real gross domestic product is reduced by 2% to 3%.


Since your unemployment level is at the natural rate, then in Okun's theory, unemployment has a zero effect on GDP. (Of course to believe this you'd need to be in La La Land)

Then if you discount lots of other factors, the GDP growth rate will be the inflation rate.


If you're a student doing your home work, then there are specific formulae which you probably have to use.

Reality is really different though. GDP and inflation indexes are suspect. Items in the CPI and RPI, can be carefully selected to give the impression of low inflation when in reality the inflation rate is much higher, or even lower. I believe, GDP figures are bloated by bogus reciprocal purchase agreements, and there are probably more tricks I don't know about for giving the illusion of economic activity. I've heard one accusation recently, I haven't had time to look into, that the ONS in the UK had been nudging the figure upwards by so much, that it's at least 13% higher than it actually should be.

The UK at the minute has rising unemployment, and rising inflation, and the growth rate is deadlining. If you believe the right-wing tripe they teach in universities, this is not what should be happening. But it is what is happening.

freeze4real

I would say the op might have needed that for his assignment and it might be to late by now but i'd love to see what question its as i couldn't solve a similar question to what the op was asking.

nesf

krd wrote: »

If you believe the right-wing tripe they teach in universities, this is not what should be happening. But it is what is happening.

If you do economics at third level they'll teach you Okun's law while pointing out instances where it's been shown not to apply. The flawed nature of economic models was very much impressed upon me in college. The point being the difficulty in modelling such complex systems and the necessity for relatively simple models for teaching purposes. Only very naive people could come out of an economics degree actually thinking something like Okun's law was, well, a law of nature.

There are plenty of times when it's not completely wrong though.

krd

nesf wrote: »

If you do economics at third level they'll teach you Okun's law while pointing out instances where it's been shown not to apply.

Then why is the sin qua non management of inflation based on the RPI and CPI.

It would be politically unpalatable to manage inflation by directly influencing employment/unemployment - by loudly proclaiming that was actually what you were doing by yanking up central bank interest rates.

How it works. A fat cat who can barely sit in a chair, they have so much fat dribbling over the edges (go out to Dun Laoghaire and see all the wealthy people rolling around like big blobs - unfit for any work but stroking pens on paper), sees through research data, that the average worker has more in their shopping basket than they did before. They see they're getting too much of a good thing and need to be taught a lesson. They need to teach these people that they are being greedy and hurting the rich people - the rich people who out of their benevolence and brotherly love, have given the poor people the opportunity to have the dignity of work. So, it's time to employ the "invisible hand" to teach these dirty and ungrateful animals a lesson. Interest rates are raised, some unemployment is manufactured, and the fear of god is put in the hearts of the dirty classes. "inflation" falls, the fat cats and their families have nice holidays, and gorge themselves on the fruits of the labour of others.

The flawed nature of economic models was very much impressed upon me in college. The point being the difficulty in modelling such complex systems and the necessity for relatively simple models for teaching purposes.

Flawed? Depends on who you are. If it doesn't work, it doesn't work. It doesn't hurt the rich. Throw a few lambs to the wolf - see if it loses its' appetite. If it doesn't, you might have to give it some skin of your own.

Only very naive people could come out of an economics degree actually thinking something like Okun's law was, well, a law of nature.

And only a naive person would think the economics taught in universities is ideology free - or is for the benefit of society in general, and not a tool to serve the wealthy, to the detriment of anyone who gets in the way - or is "inefficient"

There are plenty of times when it's not completely wrong though.

Of course it's wrong plenty of times - sometimes you can't get a bump out of gouging the poor. They're all gouged out. And other factors over-ride your efforts - then you have to start a war and rob stuff off brown skinned people. Get the dirty poor to go fight a war for you. Give them a tin badge - for risking their lives for "their" country.

You have to laugh, don't you.

Going off to fight for "your" country when you don't own any of it. And you're actually fighting for someone else's property. Fat lazy people who wouldn't spit in your face. Dirty pig people, who have pieces of paper saying they "rightfully" own every inch beneath your feet.

You could laugh til you vomit. The poor go to fight wars, thinking it's some grand sacrifice for their own people and for "their" country. When they're murdering and dying for the parasite classes.

nesf

When you understand what you're talking about we can have a chat, I honestly lack the patience and energy to walk you through all the stuff you need to get your head around.

Start with what mathematical models of complex systems are and what they are not.

krd

nesf wrote: »

When you understand what you're talking about we can have a chat, I honestly lack the patience and energy to walk you through all the stuff you need to get your head around.

You know, you could be sounding like an ancient high priest, who says I know nothing, because I don't know how to read the entrails of goats correctly.

Start with what mathematical models of complex systems are and what they are not.

I know what can be done with mathematical models. I know you can add hundreds more variables. You can create Sim Cities with models.

The reality is this theory, and this kind of modelling, is applied to the real world for ideological and material ends.

Complexity may make the models look more impressive. All the wires, flashing lights, and microchips. With more than a little tinge of religious obscurantism.

I don't care if a central banker has a fancy economic model - or even if anyone else has one. That is mystification. In the end of the day, they have a crude lever they yank up and down on the basis of "let's see what happens". If the economy is growing, and there are indications of wage inflation (god forbid - only wild asset inflation is allowed). The lever is yanked up a little - a few points added to the rate. If it goes to plan, within weeks, thousands of workers are sacked from their jobs. This will be reflected in their grocery basket. If that doesn't happen, then they yank the lever higher until it does happen. Then if they see this is hurting the balance sheets of big capital, they drop the lever. They may eventually run out of road.

The application of a theory like NRU, allows for a constant transfer of wealth away from labour. It's a system of economic management that keeps a large portion of a population in constant and managed poverty, and yo-yo-ing in and out of sporadic employment. Of course that suits some people down to the ground, as it maximise their wealth. Figures and models aside,it doesn't really enhance the quality of human relations.

Would any population, democratically chose that kind of system. The independence of central banks wasn't to stop politicians tampering with the system for quick electoral gains. It was to hand absolute control over to anti-democratic right-wing ideologues.

What underlines NRU, is not some science. It's ideology and morality. A morality that says, certain people are deserving, and others are not. Take away the smoke and bendy mirrors and that is what it is all about.

A democratic approach wouldn't be NRU. Instead of aiming for an unemployment level - You could aim for full employment and a maximum wage that was tolerable for growth, and didn't cause an inflationary spiral. I believe it would lead to more wholesome economic growth and wealth creation. Than gouging wealth transfers, and silly asset bubbles - if you've paid close to a million for a very ordinary semi-d in Foxrock, you're not a success, you're a sucker. In real terms, you have a lower standard of living than the average New Jersey garbage man - and I have looked all this stuff up.

nesf

krd wrote: »

You know, you could be sounding like an ancient high priest, who says I know nothing, because I don't know how to read the entrails of goats correctly.



I know what can be done with mathematical models. I know you can add hundreds more variables. You can create Sim Cities with models.

The reality is this theory, and this kind of modelling, is applied to the real world for ideological and material ends.

Complexity may make the models look more impressive. All the wires, flashing lights, and microchips. With more than a little tinge of religious obscurantism.

I don't care if a central banker has a fancy economic model - or even if anyone else has one. That is mystification. In the end of the day, they have a crude lever they yank up and down on the basis of "let's see what happens". If the economy is growing, and there are indications of wage inflation (god forbid - only wild asset inflation is allowed). The lever is yanked up a little - a few points added to the rate. If it goes to plan, within weeks, thousands of workers are sacked from their jobs. This will be reflected in their grocery basket. If that doesn't happen, then they yank the lever higher until it does happen. Then if they see this is hurting the balance sheets of big capital, they drop the lever. They may eventually run out of road.

The application of a theory like NRU, allows for a constant transfer of wealth away from labour. It's a system of economic management that keeps a large portion of a population in constant and managed poverty, and yo-yo-ing in and out of sporadic employment. Of course that suits some people down to the ground, as it maximise their wealth. Figures and models aside,it doesn't really enhance the quality of human relations.

Would any population, democratically chose that kind of system. The independence of central banks wasn't to stop politicians tampering with the system for quick electoral gains. It was to hand absolute control over to anti-democratic right-wing ideologues.

What underlines NRU, is not some science. It's ideology and morality. A morality that says, certain people are deserving, and others are not. Take away the smoke and bendy mirrors and that is what it is all about.

A democratic approach wouldn't be NRU. Instead of aiming for an unemployment level - You could aim for full employment and a maximum wage that was tolerable for growth, and didn't cause an inflationary spiral. I believe it would lead to more wholesome economic growth and wealth creation. Than gouging wealth transfers, and silly asset bubbles - if you've paid close to a million for a very ordinary semi-d in Foxrock, you're not a success, you're a sucker. In real terms, you have a lower standard of living than the average New Jersey garbage man - and I have looked all this stuff up.

You're arguing from ideology not facts. I really have little interest in debating this with you since I'll never convince you of anything.

krd

nesf wrote: »

You're arguing from ideology not facts. I really have little interest in debating this with you since I'll never convince you of anything.

If you're taking the position, that you are not taking an ideological position, you are taking an ideological position.

Certain areas of economics are very far from being neutral.

I have a problem with NAIRU, NRU, or any of its' other "by the back door", or mystified equivalents.

Some engineering is just not value or morally neutral.

I leave you with a joke.

An engineer presented with a problem will ask "How can I maximise the flow of gas in this pipe. How can I most efficiently distribute the gas from the outflow." A social scientist, presented with the same problem will ask "Is right that we're gassing all these people?".

nesf

krd wrote: »

If you're taking the position, that you are not taking an ideological position, you are taking an ideological position.

Certain areas of economics are very far from being neutral.

I have a problem with NAIRU, NRU, or any of its' other "by the back door", or mystified equivalents.

Some engineering is just not value or morally neutral.

I leave you with a joke.

An engineer presented with a problem will ask "How can I maximise the flow of gas in this pipe. How can I most efficiently distribute the gas from the outflow." A social scientist, presented with the same problem will ask "Is right that we're gassing all these people?".

I came from a science/applied maths background into economics. I wasn't particularly swayed by it either way, all I cared about were the mathematical models and whether they fitted reality well since that's what I get my kicks from academically. And yes, I've serious problems with whole swathes of economics but for technical reasons not ideological ones.

What I've a problem with is someone dismissing entire swathes of economics because they don't agree with their ideology. If you want to convince me that there's a problem with NRU then show me how the model doesn't work in technical terms, otherwise please don't bother me.

krd

nesf wrote: »

I came from a science/applied maths background into economics. I wasn't particularly swayed by it either way, all I cared about were the mathematical models and whether they fitted reality well since that's what I get my kicks from academically. And yes, I've serious problems with whole swathes of economics but for technical reasons not ideological ones.

Yeah. I know. I've come from a similar background, and the first time you see those equations it's a bit of shock, isn't it. And I bet, that even now, every time you look at them, they give you an awful feeling, like having a raspberry seed caught between your teeth.

What I've a problem with is someone dismissing entire swathes of economics because they don't agree with their ideology. If you want to convince me that there's a problem with NRU then show me how the model doesn't work in technical terms, otherwise please don't bother me.

I'm not dismissing swathes of economics. My problem with NRU is not that it doesn't work, it's because it does work.

If you want to see the ideology revealed - the first word in the TLA (Three Letter Acronym) is "natural", as if it is a qualifier as holy law of god, or something Isaac Newton discovered - something as immutable as the speed of light, or gravity - something that has to be accepted. Why does that word even need to be there. What's it doing there. ......Why is it there.

Equally, you could have models that have NRMW (the natural rate of the maximum wage, that neither causes inflation or inhibits growth - or you know what I mean) .

Look into it yourself. And I bet - growth. The only justification for the current system we have - would be equally with both. Put your engineering hat on and take a look. I would really like to see the results one way or another.

nesf

krd wrote: »

Yeah. I know. I've come from a similar background, and the first time you see those equations it's a bit of shock, isn't it. And I bet, that even now, every time you look at them, they give you an awful feeling, like having a raspberry seed caught between your teeth.

It gets better at post grad level and above. Some interesting maths/models there. Especially Central Banking stuff, I've had some good chats with guys who do modelling at the ECB and in fairness to them they're very much aware of the shortcomings of the traditional models and use alternatives as well.

krd wrote: »

I'm not dismissing swathes of economics. My problem with NRU is not that it doesn't work, it's because it does work.

If you want to see the ideology revealed - the first word in the TLA (Three Letter Acronym) is "natural", as if it is a qualifier as holy law of god, or something Isaac Newton discovered - something as immutable as the speed of light, or gravity - something that has to be accepted. Why does that word even need to be there. What's it doing there. ......Why is it there.

Equally, you could have models that have NRMW (the natural rate of the maximum wage, that neither causes inflation or inhibits growth - or you know what I mean) .

Look into it yourself. And I bet - growth. The only justification for the current system we have - would be equally with both. Put your engineering hat on and take a look. I would really like to see the results one way or another.

Natural in this context just means, normal. As in there will always be some level of unemployment in a country because of people being between jobs, people retraining due to sectoral shifts and so on. Around 3% seems typical for a booming economy etc. Unemployment is measured in snapshots every 3 months, these will always catch some people between work etc and so on. Just the way it works.

I don't think there's anything ideological at play. One could call it the typical rate of unemployment and lose none of the meaning. And to be fair it has been observed in pretty much every developed economy.

krd

nesf wrote: »

Natural in this context just means, normal. As in there will always be some level of unemployment in a country because of people being between jobs, people retraining due to sectoral shifts and so on. Around 3% seems typical for a booming economy etc. Unemployment is measured in snapshots every 3 months, these will always catch some people between work etc and so on. Just the way it works.

Not in the context of NRU. In NRU, the Natural Rate of Unemployment, is considered the level of unemployment that neither causes inflation to decrease, or increase.

What you're think of is something else. Theoretically, in a booming economy you will have full employment. But since people changing jobs, or re-train, or are just leaving school or college, there should be a level of unemployment. The consensus has been that this level is about 3% unemployment. It has nothing to do with inflation. You could put that 3% down to a lot of factors. Just looking on wikipedia - that 3% level would be called frictional unemployment.

We've had periods in Ireland where the unemployment level fell to close to the 3%, inflation didn't start to spiral, and there was growth. So, it's instances like that are used to argue against something like NRU. Of course, I believe that's a wrong idea. As there's always some kind of back door NRU going on.

There are other factors, and little bits of engineering, that can alter the NRU. a more "flexible" labour market, will have a lower NRU. If people can be fired at the drop of a hat, they simply can't make wage demands - or it becomes much harder. The NRU level falls.

It's not something that can be modelled precisely. There are just too many intangibles. And it takes time after any variable is changed for it to feed into the system.

Something crucial. For your own reasons, you may assume that an economy is "booming", if there's full employment. It's only booming from the perspective of people who have nothing else to bargain in the economy with except their labour. For people who have capital or assets. They may not be happy - their avarice may not be sated. If labour has more power - then capital will be less "efficient". And it's the same for inflation. These people panic when they see wage inflation, or indications of wage inflation - but are very happy, and will even rig the system for asset price inflation. House prices going through the ceiling, while real wages are stagnant or falling.

Egypt's economy was "booming" - literally sky rocketing. between 2000 and 2010, GDP more than doubled. How could there be any discontentment in such an economic paradise. How? These people never had it so damn good.

Let's see what happened for the average Egyptian. Unemployment actually increased during this period. Employment in the civil service fell on average by 2% a year. As government owned enterprises were privatised (wonderful if you were connected to Hosni Mubarack). The wages of the average Egyptian are very low. When in the late noughties grain prices started to rocket, they didn't see a corresponding rise in their wages - how could they - the Egyptian labour market was so liberalised, if you asked for more you could end up being jailed and tortured. The grain price spike of 2007/8 saw riots in Egypt. People were hungry.

The grain prices fell, and the rioting stopped. But what you see in this great period of "boom" is the average Egyptian seeing their share of the wealth they were creating decrease, and their standards of living fall.

The grain prices fell, and the rioting stopped.

But now, we shall see in a graph of world wheat prices what happened next.



The Egyptian revolution didn't happen because people wanted to be freer to use Twitter and Facebook.

I don't think there's anything ideological at play. One could call it the typical rate of unemployment and lose none of the meaning.

NRU is a very specific idea. In the NAIRU acronym, it's much clearer (Non-Accelerating Inflation Rate of Unemployment).

The Natural is in NRU, to give it an air of beneficence. Like Natural yoghurt, or 100% natural ingredients.

And to be fair it has been observed in pretty much every developed economy.

Yeah. Because ideology has been so successfully pushed over the last forty years, it's become the orthodoxy. Chicago school economics is something that started on the fringes, by people many people considered cranks, and made its way to the centre, and now has successfully pushed out any competing ideas.

If countries do not play ball and adopt the theory, they are punished.

Every country. Even a country like Iran, who have seen their GDP more than triple in the last decade. Even the Iranians are playing the same game. They've seen their wealthy more than double their wealth, but they have persistently high unemployment and poverty. They subsidise basic food stuffs - and fuel. I hope they're foolish enough to listen to one of those "let the market decide" mavens at some point, and stop subsidies.

nesf

krd wrote: »

Not in the context of NRU. In NRU, the Natural Rate of Unemployment, is considered the level of unemployment that neither causes inflation to decrease, or increase.

Not quite, NRU is the long run unemployment for an economy in a given state. With various economic institutions and supply side factors and full demand for an economy in the absence of cyclical factors unemployment will converge to the NRU (i.e. what I was talking about and also known as full employment by economists). This rate is conjectured to not cause inflation or deflation and to be stable but there are problems with this.

The main one is hysteresis which is the altering of the NRU in the absence of institutional change. It can be thought of as a shadow being cast by recessions where even after an economy returns to full demand after a recession, unemployment stays stubbornly higher than before the recession for an extended period despite everything else being the same as before the recession. NAIRU also has this problem. The second one is short term fluctuations in unemployment don't automatically cause shifts in long run inflation.

So we now see most people using a time varying NAIRU rather than a static one, expectations augmented Phillips Curves (i.e. short run Phillips curves where unemployment fluctuations don't change the long run inflation rate) and so on.

The current state of theory (which to be honest I'm not fully up on) is a lot more complicated and nuanced than you're making it out to be. What you're saying might have reflected thinking in the 70s but it definitely doesn't reflect thinking today.

krd

nesf wrote: »

Not quite, NRU is the long run unemployment for an economy in a given state. With various economic institutions and supply side factors and full demand for an economy in the absence of cyclical factors unemployment will converge to the NRU (i.e. what I was talking about and also known as full employment by economists). This rate is conjectured to not cause inflation or deflation and to be stable but there are problems with this.

There's a video clip around somewhere of Milton Friedman saying if the NRU has to be 40 or 50%, then that's what it has to be. Before the September 11th coup in Chile in 1973, unemployment was around 4% (inflation was quite low too), within a year it was above 40%. I don't think anyone could describe 40% as full employment.

Before the coup Chile wasn't on the verge of economic collapse. The "restructuring" was very painful for the majority, but it transferred and astounding amount of wealth to the wealthy minority. They were very happy indeed.

The NRU, is as conceptual as anything else. If you're above it, you have inflation, below it your have deflation. But you can cover that deflation through credit an asset price inflation. So you can have a property bubble when wages are stagnant or falling.

The main one is hysteresis which is the altering of the NRU in the absence of institutional change.

Hysteresis, is another way of saying "there is a lag" - it comes from the Greek word for womb - which gives it the same etymological root as hysterical. Any economic event will take a long or short time, to have an effect on the rest of the economy. Sometimes it's really quick sometimes it's really slow. Often, it's impossible to determine if something did or didn't have an effect.

It can be thought of as a shadow being cast by recessions where even after an economy returns to full demand after a recession, unemployment stays stubbornly higher than before the recession for an extended period despite everything else being the same as before the recession.

This is what is known as a jobless recovery. Recessions create unemployment, unemployment lowers wages. Lower wages makes companies more profitable. Money rushes into the stock market. We're told we're in a "boom" - for some people we are. Companies then, eventually expand, and hire. The pool of unemployed falls - this puts upward pressure on wages.

NAIRU also has this problem.

A problem for whom? If you have assets and capital, a jobless recovery is perfect.

The second one is short term fluctuations in unemployment don't automatically cause shifts in long run inflation.

I'm not so sure. Outside of a model, who could say it did or it didn't. These figures are always released to the market in the short-term. Then the market, in it's own peculiarly schizophrenic way reacts to the numbers. So, it's hard to say what leads to what.

So we now see most people using a time varying NAIRU rather than a static one, expectations augmented Phillips Curves (i.e. short run Phillips curves where unemployment fluctuations don't change the long run inflation rate) and so on.

It depends on how you gauge your inflation. In my opinion the indexes are gamed to give figures that are desirable to the markets. Inflation in individual items can happen incredibly quickly. The Russians can switch off the gas to the Ukraine, and gas prices can quadruple in days. During the 07/08 grain price spike, I watched the price of supermarket cooking oil, fluctuate in line with diesel prices - because of the whole bio-diesel nonsense, cooking oil was being used as fuel.

But you can game the inflation indices. If you'd like house price inflation - remove houses from the index (make up some nonsense excuse to cover the fact that's what you're really up to - everyone with property interest will give you a wink). Throw in some non-perishable white goods that are not hugely effected by short-term inflation either way - this will help drag up or down the index if food and fuel prices have just rocketed.

Real inflation is tricky. Prices can increase because lack of demand can effect economies of scale.

The current state of theory (which to be honest I'm not fully up on) is a lot more complicated and nuanced than you're making it out to be. What you're saying might have reflected thinking in the 70s but it definitely doesn't reflect thinking today.

Just look at George Osbourne in the UK. There is no nuance. Just sack thousands of civil servants and expect inflation to fall and the private sector to grow. Where instead, inflation has risen and the private sector shrinks, GDP growth has flat lined.

I'd like to be in a world where men in expensive suits, on nice salaries, speak confidently in a language I can barely understand, and assure me they know what they're doing, and everything is going to be taken care etc. They have the models.

But it's not really the world I live in. The guy in a suit, probably has his job because he's someone's nephew (Remember the two Brians, Cowen and Lenihan). He's probably a ladder climbing Machiavellian, who'll say anything if he thinks it will keep his bosses happy. He probably doesn't know what to believe any more, and just thinks the whole science of economics is joke - that everything is just a joke. And his objective is just to navigate up through his organisation and swim in the waters of the protected social classes.

In other words. It's just meaningless marketing.

nesf

Look, I'll discuss models with you all day quite happily but you're not talking about models you're talking about ideology here and macroeconomic policy making which is completely different. I really have little interest in discussing NAIRU and such in that context.