BEE Partner, South Africa Economy Watch

The government budget tends to move counter-cyclically. In a slump, incomes will be reduced and spending curtailed, so tax collections will fall, but welfare and related spending to support the unemployed will tend to rise. Other government budget items are likely to be unaffected. Hence, the overall effect will be to throw the budget into deficit. By contrast, in a boom, tax collections will rise and welfare spending will tend to decline, so a surplus will tend to emerge. In short, in an economy with demand-based cyclical fluctuations, the central government budget will tend to move in a counter-cyclical fashion.

Now consider the monetary implications of deficits and surpluses. A deficit arises when the government spends more than it receives in taxes; this means a net increase in money in the system. Such money will appear as excess reserves in the banking system. If allowed to remain, it will drive down interest rates. Looked at another way, it will drive up security prices. A surplus is just the opposite; it arises when the government spends less than it takes in, and it creates a reserve deficiency, tending to force interest rates up. Read the rest of this entry »

This rate has to be the target for which policy makers aim. If they try to reduce unemployment below this rate, they may temporarily succeed, but inflation will ultimately take off. If they raise unemployment above this rate, inflation will decline, but it will not stay lower, or even continue to fall, unless inflationary expectations are lowered. For this to happen, unemployment must stay high, but unnaturally high unemployment, coupled with lower than normal inflation, will lead employers to believe that real wages are exceptionally low. So they will begin to hire labor, and unemployment will move back to its natural level. Inflationary expectations are therefore unlikely to be lowered. Read the rest of this entry »

The idea behind the Phillips Curve is that higher inflation is associated with lower unemployment, and vice versa. Intuitively, this seems plausible enough. The stronger the economy, the more business is booming, the more jobs there will be. So we can expect the rate of unemployment to be lower. Indeed, it may fall to a point where shortages of various labor skills begin to emerge. In general, the more the economy is booming, the more likely there are to be shortages and inflationary pressures. By the same token, in a slump, excess labor and excess capacity will reduce inflationary pressures, and may even lead in some areas to price cutting. Read the rest of this entry »

In the face of wage—price pressures, the Job Guarantee approach maintains inflation control by choking aggregate demand and inducing slack in the non- buffer stock sector. As the slack does not reveal itself as unemployment, the Job Guarantee may be referred to as a ‘loose’ full employment. This leads to the definition of a new concept, the NAIBER, which, in the buffer stock economy, replaces the NAIRU/MRU as an inflation control mechanism. The BER is the ratio of buffer stock employment to total employment.

As the BER rises, due to an increase in interest rates and/or a fiscal tightening, resources are transferred from the inflating non-buffer stock sector into the buffer stock sector at the fixed buffer stock wage. Read the rest of this entry »

In this section we focus on inflation control and show that the Job Guarantee, able to simultaneously generate full employment and price stability, is superior to the current NAIRU approach, which uses unemployment to maintain inflation control. Broadly, there are three options available to an economy that desires price stability. First, as in the NAIRU approach, it can use unemployment as a tool to suppress price pressures. Second, it can introduce a Job Guarantee and use movements in the Buffer Employment Ratio (BER) to control inflation. Third, it can introduce the Job Guarantee policy and augment it with an incomes policy. We do not consider this third option.

The Role of Unemployment in Inflation Control

The OECD experience of the 1990s shows that high and prolonged unemployment eventually results in low inflation (Mitchell, 1996). There are several observationally equivalent theoretical explanations for the inflation—unemployment trade-off. Read the rest of this entry »