Recent monetary policy has helped control inflation which, in turn, has kept unemployment rates low according to detailed research funded by the Economic and Social Research Council.
The wider economic community is reluctant to accept that monetary policy affects the underlying natural rate of unemployment. However, in the light of the research, there is clear evidence to suggest that these views should be re-thought. Unions may need to change their stance on interest rate control and its perceived negative impact on employment rates. The studies, carried out by Professor Christopher Martin, Department of Economics and Finance, Brunel University and Dr George Bratsiotis, School of Economic Studies, University of Manchester, reveal that wage rises have a greater detrimental impact on employment levels when monetary policies are aimed at stabilising inflation.
In the models used in the research, policy makers are assumed to be far more concerned about inflation and output. A stronger preference for low inflation, for example by targeting, results in lower unemployment rates. If this is the case, and the research strongly suggests it is, supporting monetary policy which seeks to control inflation, would be in the greatest interest of trade union members and all workers.
Part of the research involved analysing and estimating two theoretical economic models. One aims to show how changes in monetary policy has an impact on unemployment rates and the other on how higher wages leads to increases in unemployment levels. The models, that have been developed and adapted from existing economic theories, were then tested against historical data and actual experience over the last three decades to see how well they performed.
“We think we’ve come up with a model that explains the data much better than some of the more conventional ones that have fixed parameters,” said Professor Martin. “With monetary policy changes factored in, we’re able to estimate employment rates much more accurately. The trouble with conventional models is that they can’t explain the low unemployment rates of the last ten years.”
Using the first model, for example, it was found that granting independence to the Bank of England in 1997 had very little impact on the rate of unemployment. In addition, in estimating the effects of inflation targeting policies over a ten-year period (1992-2001), the model was found to accurately predict the lower rates of unemployment that were actually recorded. In analysing such findings and other tests that were applied to the model, Professor Martin and Dr Bratsiotis concluded that there is, strong empirical support for our approach. In future, all economists attempting to make predictions about unemployment levels would be well advised to use their variable parameters model.
In using the second model, Professor Martin points out that there are two channels through which higher wages reduce employment levels. “Companies experience what we call a ‘relative price effect’. In paying higher wages, their goods and services need to become more expensive which can lead to a fall in demand - forcing them to cut labour,” said Professor Martin. “Firms do this to themselves, which means it’s not subject to monetary policy.”
On the other hand, Professor Martin explains, a second channel, which they call the ‘aggregate demand effect’, is determined by monetary policy. “This effect can be demonstrated through monetary policy that seeks to stabilise employment levels by increasing the money supply - which offsets higher prices - it actually helps keep employment levels stable throughout the economy. By contrast, if price levels are stabilised by reducing the money supply, then the reduction in employment is intensified - people loose their jobs.”
More articles from Business and Finance:
Texas Tech Cotton Economists Unveil New Global Cotton Outlook Analysis
03.05.2013 | Texas Tech University
Common component strategy could improve profits
30.04.2013 | University of Illinois at Urbana-Champaign
A fried breakfast food popular in Spain provided the inspiration for the development of doughnut-shaped droplets that may provide scientists with a new approach for studying fundamental issues in physics, mathematics and materials.
The doughnut-shaped droplets, a shape known as toroidal, are formed from two dissimilar liquids using a simple rotating stage and an injection needle. About a millimeter in overall size, the droplets are produced individually, their shapes maintained by a surrounding springy material made of polymers.
Droplets in this toroidal shape made ...
Frauhofer FEP will present a novel roll-to-roll manufacturing process for high-barriers and functional films for flexible displays at the SID DisplayWeek 2013 in Vancouver – the International showcase for the Display Industry.
Displays that are flexible and paper thin at the same time?! What might still seem like science fiction will be a major topic at the SID Display Week 2013 that currently takes place in Vancouver in Canada.
High manufacturing cost and a short lifetime are still a major obstacle on ...
University of Würzburg physicists have succeeded in creating a new type of laser.
Its operation principle is completely different from conventional devices, which opens up the possibility of a significantly reduced energy input requirement. The researchers report their work in the current issue of Nature.
It also emits light the waves of which are in phase with one another: the polariton laser, developed ...
Innsbruck physicists led by Rainer Blatt and Peter Zoller experimentally gained a deep insight into the nature of quantum mechanical phase transitions.
They are the first scientists that simulated the competition between two rival dynamical processes at a novel type of transition between two quantum mechanical orders. They have published the results of their work in the journal Nature Physics.
“When water boils, its molecules are released as vapor. We call this ...
Researchers have shown that, by using global positioning systems (GPS) to measure ground deformation caused by a large underwater earthquake, they can provide accurate warning of the resulting tsunami in just a few minutes after the earthquake onset.
For the devastating Japan 2011 event, the team reveals that the analysis of the GPS data and issue of a detailed tsunami alert would have taken no more than three minutes. The results are published on 17 May in Natural Hazards and Earth System Sciences, an open access journal of ...
22.05.2013 | Life Sciences
22.05.2013 | Ecology, The Environment and Conservation
22.05.2013 | Earth Sciences
17.05.2013 | Event News
15.05.2013 | Event News
08.05.2013 | Event News