Milton Friedman argues that if there were 100% full employment, that this would correspond with runaway inflation. Can anyone explain why this is so? In my understanding full employment would mean more productivity and competition, which if im not mistaken, should drive prices down, ceteris paribus.
EDIT: Kaju, Those that arent actively looking for work, arent considered unemployed by my understanding, so retirees and children and students would be taken out of employment figures. I can understand those that are frictionally unemployed, but if we were to assume that there are none and there is no structural employment, would that still lead to runaway inflation?
It is practically impossible to get everyone a job. Think about it: 100% employment means that nobody is in the process of switching from one job to another, the disabled even have jobs, etc. In a free market, there are always some people who are unemployed because they are either not able to work a job, they’re retired, they’re too young, or they’re in the process of moving from one job to another. In order to achieve 100% employment, the government would have to print an insane amount of money depressing real wages and making it extremely profitable for businesses to hire even the least productive people.
I might add, however, Kaju, that the government would have to abolish the minimum wage and/or refuse to increase it while they were increasing the money supply, as well, otherwise, businesses would refuse to hire the unskilled because of the skill-floor of the minimum wage.
Frictional unemploy is made up of those that are unemployed, but have transferreable skills. I.e. business A and business B are related. Business A’s products are in less demand and business B’s are in more demand, and so A fires some employees, but B, since they are expanding production, hire employees.
Structural unemployment is where some jobs are eliminated and there are no transferreable skills, so these members of the labor force cannot immediately transfer to a new line of work and must learn a new skill.
These types of unemployments are an inherent part of any market economy.
Unless the minimum wage is below the market wage. That is, if the minimum wage does not increase as the average wage increases. So, assuming constant productive growth, and therefore increase in wages, but no increase in the minimum wage, you could still have full employment. Note, I am not a proponent of minimum wage, but just describing a scenario where minimum wage could be irrelevant.
I was speaking strictly within the concept of what Krazy Kaju had presented.
But yes, I agree with your surmise…IMHO Oklahoma is an excellent example of how an economy is perfectly functional and how wages can be completely fair in a Free Market…while they do have a minimum wage, it’s extremely low (less than $3 an hour), which is most likely below the market rate for the vast majority of jobs on the market…Granted, it should still be abolished, as it probably does set a skill-floor for a couple of jobs out there, but never-the-less, it’s still a powerful argument against the minimum wage.
Under whose market wage? You’re thinking in aggregates. There is no such thing as an aggregate market wage. Many different market participants earn different wages. So increasing the minimum wage, even if it were below “the market wage” would still cause unemployment, since it would be above the market wage for the least skilled.
Oh of course. But, it’s entirely possible that a minimum wage can be below all market wages. For example, I don’t think anybody in the United States would be making $.05 an hour in productive times. Of course, there would be no point to a minimum wage, but it’s entirely possible that full employment exist with a minimum wage.
Friedman was the guy who famously said “inflation is always and everywhere a monetary phenomenon”, so I find the full employment claim very hard to beleive.
what’s wrong with Friedman’s analysis? He believed that inflation was an expansion of the money supply, as the Austrians did…that said, he believed a small amount of inflation was necessary (IIRC he wanted a computer to expand it by 3% each year and the Federal Reserve would be abolished), and a few other incorrect (IMHO) theories.
That said, what makes you think inflation isn’t a monetary phenomena? It certainly isn’t a fiscal one.
There’s nothing wrong with Friedman’s analysis. I agree that inflation is a monetary phenomenon.
That’s why I find the OP’s claims perplexing. Why exactly would Friedman beleive that full employment/ potential output leads to “runaway inflation”, when inflation is clearly a monetary phenomenon? The only thing that could cause runanway price inflation is runaway money creation.
This is why I wonder why Friedman would say such a thing?
It most certainly reminds me more of Keynesianism and the Phillips curve in which employment and inflation are “supposedly” direct inverses of each other, even though the 70’s stagflation completely disproved this. But for Friedman to take this stance is somewhat baffling.
ahh, I see what you’re driving at; I thought that you were doubting boht of Friedman’s points.
In any event, perhaps he thinks that in order to have 100% employment you have to have runaway inflation because of his flawed monetarist views? It’s often touted in today’s economics that we have “low inflation, but high unemployment” or “high employment, and high inflation”.