Friday, February 19, 2010

World Unemployment Rates And The Ideal Inflation Rate

In my macro classes this week, I talked about unemployment. Our policy goal is full-employment which means we want to have the lowest rate of unemployment compatible with price stability (when I first took economics in 1978 it was thought to be a 4% unemployment rate). Price stability means a 3% or lower annual inflation rate. The idea is that if we try to0 hard to lower the unemployment rate by increasing AD, inflation will get too high. I explained how this works with a post from last October called Fed Officials Disagree On Threat Of Inflation. It has a graph that shows what happens with AD and AS and how inflation accelerates as AD increases.

Professor Mark Thoma of the University of Oregon had a post at his blog recently on the disagreement over what the optimal inflation rate is called Do We Need to Rethink Macroeconomic Policy?. Some economists think maybe 4% would be okay. But this article gives you a good idea of the issues and controversies surrounding the unemployment-inflation tradeoff.

It might seem silly to worry about small differences in percentage rates, like a 4% vs. 5% unemployment rate. But if economists concluded that full-employment was a 5% unemployment rate but it was really 4%, then our policies would leave about 1.5 million people unemployed since the labor force has about 150 million people in it. On the other hand, if policies tried to lower the UE rate to 4% but the full-employment UE rate is really 5%, then we could trigger very high rates of inflation. So this discussion of the ideal inflation rate is very important.

I did not get a chance to talk too much about unemployment rates in other countries. So here are links to some info on that:

The CIA's country ranks by unemployment rates

A report on current country rates from the OECD

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