runnable said:
I think otherwise. The NAIRU and rising participation rates are much more in the syllabus than short/long $#@#@ Philips curve nonsense. The syllabus doesn't even mention philips curve.
Of course with the syllabus it can be hard to say what is in it. However, the expectations-augmented Phillips curve is an integral part of the theory of the Natural Rate of Unemployment and NAIRU; it in truth explains why the NAIRU exists. Ergo i would believe that it should be covered under what the syllabus terms the 'natural rate of unemployment.' The fact that plenty of other people learnt about it as well suggests their teachers believed it was in the syllabus too. Bad luck to those who didn't learn about it; seeing it's what the question tests.
With regards to the actual question, a few thoughts. If anyone is still claiming that the economy cannot go beyond the NAIRU (i would have thought the name 'NAIRU' would have given this away), Australia is definately past it at the moment. And has been for the best part of 2 years. Admittedly it is a figure that is effectively impossible to calculate exactly- but treasury believes it is around 4.7%. Which makes sense because in the past several years, when currency appreciation should have sheltered us from inflationary pressures, inflation has been quite high. Although the Credit Crunch has undoubtedly affected the numbers, around budget 08 time treasury was pointing to inflation slowing and unemployment rising to around 5%, at which point the labour market would stop exacerbating inflation. Thus, as any extended Phillips curve will tell you, economies can temporarily (and in our case a year or two because AD has been so strong- but in economic terms 1-2yrs pretty much is short term) go below the NAIRU, because as that smart uni guy said cyclical unemployment effectively becomes negative.
With regards to the arguement about hidden unemployment and rising participation rates- nice idea but wrong for several reasons which can be noted when extrapolating the theory.
- If hidden unemployment reduces sharply following AD stimulation at the NAIRU, and participation increases, and over however long these people flow into jobs, why would inflation increase? Inflation due to the labour market will only occur due to a tightening market. By a continuation of logic, if inflation doesn't rise, the economy can't really be at the NAIRU in the first place. And the NAIRU becomes a meaningless concept.
- Increases in labour participation don't neccessarily lead to increased unemployment, even initially. Remember that calculations are done monthly, unemployed people are only counted once they apply for centrelink etc. I.e. many new entrants are never recorded as unemployed. Statistically, in 2006-07 the RBA has recorded 11 individual increases in participation rate. 3 led to higher unemployment, 3 to lower unemployment, the rest had unchanged unemployment. In other words, the assumption that U will increase as labour participation rises is hardly true in pratice.
- Based on basic economic theory, it can be fairly safely assumed that the hidden unemployed fall into two categories- really hardcore unemployed- no applicable skills (effectively structurally unemployed) and the people who are merely 'fed up'- they have skills but have given up on finding work. As U falls towards the NAIRU, this latter group are the ones who will drive up participation by seeking employment- because higher AD is a positive signal for them. By the time the economy reaches the NAIRU, they will logically all have joined the labour force. By contrast, further AD stimulation will be little incentive to the hardcore type- if they have no skills they are highly unlikely to search for jobs; or any change in labour participation will at least be much slower.
- Presuming that the Australian economy is below the NAIRU, there is only one way of getting below- AD stimulation. Unemployment is not going to fall for any other reason. For U< NAIRU, unemployment must be able to reduce in pratice at a point when it is at the NAIRU. If hidden unemployment reduces so much that U bounces back up as AD increases, this will never happen. Which taking what we know to be correct, this is obviously a paradox.
Thus C.
As a final note- people were saying to ask teachers. Mine says C as well.
And for the record, just because you don't get a particular theory, it doesn't mean that its 'nonsense'.
