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Servaas Storm and C.W.M. (Ro) Naastepad, Macroeconomics Beyond the NAIRU

Johannes A. Schwarzer
p. 345-350
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Servaas Storm and C.W.M. (Ro) Naastepad, Macroeconomics Beyond the NAIRU, Cambridge, MA: Harvard University Press, 2012, 304 pages, ISBN: 978-0674062276

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1The book Macroeconomics Beyond the NAIRU delivers a different view on the NAIRU (non-accelerating inflationary rate of unemployment) than the standard textbook NAIRU model. The authors Storm and Naastepad emphasise the importance of endogenous productivity growth which can cause a shift of the NAIRU. Thus, some economic policies—which in the standard textbook NAIRU model will only cause inflation—may become self-sustaining if productivity growth is endogenous. To highlight this main difference between the two approaches, the authors compare both models in Chapter 1. Chapter 2 presents econometric evidence against the standard NAIRU model. Their own model, now allowing for endogenous productivity growth is introduced in Chapter 3. This model is extended and empirically underpinned in Chapters 4 and 5. Furthermore, the long-run properties of the model are addressed in Chapter 6. The “Nordic Model” is presented in Chapter 7 as a feasible alternative way of organising a market economy compared to the rest of Europe or the USA. Finally, Chapter 8 concludes.

2The main statement of this book is straightforward: In sum, expansive demand policies, higher labour market regulation and higher real wage growth can have beneficial effects on productivity, growth and employment. These positive effects thus should be taken into account with respect to economic policy. For example, tighter labour market regulation in the textbook NAIRU model (particularly assuming exogenous productivity growth) causes a higher NAIRU. As the authors show, this must not necessarily be the case if this stronger labour market regulation induces productivity growth and therefore “reduces inflationary pressures, allowing both the real wage growth and employment growth to be higher” (23).

3Expansive demand policies, tighter labour market regulation and higher real wage growth hence do not necessarily cause inflationary pressure but may become self-sustaining due to three mechanisms at work:

41. The Kaldor-Verdoorn effect (81ff.): Output growth causes productivity growth due to induced capital accumulation and the thereby embodied newest production technologies. Also economies of scale and the overcoming of indivisibilities play a role for this positive relation between output and productivity growth.

52. Factor price induced technological change (85f.): Changes of relative factor prices cause a change in the technology used in the production process. Particularly, rising real wages (stronger than productivity growth) can induce labour-saving technical progress.

63. The third mechanism at work is related to the “social relations of production” (86ff.). Workers’ motivation and thus productivity, furthermore their willingness to invest in (firm-specific) human capital or the acceptance of new technologies, may depend on the overall set of labour market regulation (particularly employment protection). Tighter labour market regulation is assumed by the authors to be beneficial for the overall climate and well-being of the worker. Hence, stronger labour market regulation can have a positive effect on productivity growth.

7To deepen the analysis, Storm and Naastepad (58ff.) differentiate between two demand regimes. While in a wage-led demand regime, higher real wage growth is, in general, beneficial for the overall rate of output growth as the net effect of higher real wage growth on demand is positive, it is detrimental in the profit-led demand regime as “higher labor cost growth reduces demand and output growth—because the consequent fall in profits and investments as well as exports is larger than the stimulus imparted to consumption” (62). This is due to the fact that higher real wage growth on the one hand raises real unit labour costs which is detrimental for investment as higher real unit labour costs cause a fall of the profit share and also have a negative impact on export growth (60). On the other hand, the corresponding redistribution of income from profits to wages cannot (in the profit-led regime) induce a more than offsetting rise in demand. Thus, in a wage-led demand regime, higher real wage growth will be beneficial for output growth while being detrimental in the profit-led regime. Furthermore, higher real wage growth will in general positively affect productivity growth (due to effects 1 and 2 described above) in the wage-led regime. On the other hand, in the profit-led regime the induced technical progress due to higher unit labour costs (effect 2) is more than offset by the negative productivity consequences (effect 1) of the fall in demand and hence output growth (64ff.)

8In describing their theoretical model, Storm and Naastepad cover many difficulties of the effects of higher real wage growth or employment protection on output, employment and productivity growth (68ff.). Depending on whether or not the economy is wage- or profit-led, the authors show on theoretical and empirical grounds that the same policy, for example labour market deregulation, can have completely different effects on the macroeconomic variables in question. Moreover, the influence of the degree of openness on the demand regime is discussed—the effect being rather small, that is, a wage-led system will not necessarily become profit-led due to greater openness (151). Furthermore, the nature of the financial system (bank-based vs. stock-market based) is shown to be interconnected with the demand regime, as wage-led regimes are much more compatible with a bank-based financial system and vice versa (155). Finally, in Chapter 7, the authors present as a case study the “Nordic Model” which succeeded in combining reasonable real wage growth, employment protection and low unemployment.

9Even though the theoretical model and the empirical results appear valid at first sight, at least some of the presented evidence is debatable (an issue also raised by Pflueger, 2012, 524). For example, the graphs and regressions on pages 154 and 156 most likely show a statistical correlation only due to the UK and the US—at least it seems strange to draw a regression line with such extreme outliers. As another example, the estimate that OECD equilibrium unemployment rose by 0.9 percentage points between the averages of 1960 through 1980 and 1980 through 2000 due to a substantial increase of the average real rate of interest by 3.7 percentage points (182f.) is equally questionable: This very strong rise of the average real rate of interest since 1980 (based on my own rough calculations) is most likely a statistical artefact which more or less vanishes if the years of the oil crises are left out (as the real rate of interest was strongly negative in these years) or if the time span under consideration is chosen slightly differently. This does not mean that tight monetary policy in the 1980s was unimportant for employment—but as also pointed out by Blanchard and Wolfers (2000, C6), “long-run effects, if present, are likely to be small.”

10In general, this book has one particular strength and weakness at the same time: It has a strong political message. On the one hand, I consider this to be a strength, as many authors (including myself) usually avoid political messages and often clear results disappear in an “on the one hand, on the other hand” back and forth. On the other hand, the reader has the strong impression that the political message is not clearly separated from the theoretical and empirical analysis and that this message is not inductively inferred from the research presented, but an ex-ante presupposition of the analysis. In summary: I very much like the idea underlying the theoretical approach, but I have the impression that value judgements are not clearly separated from the analysis. Moreover, much of the obvious and subtle critique about modern macroeconomics is unnecessary for the main contribution of this book and overshadows an otherwise very valuable research objective.

11In particular, any historian of economic thought may be baffled by what has been summarized under the acronym NAIRU and how the story is told. As an example, in Chapter 8 (a chapter which reads like a mixture of economics, sociology, philosophy and political science) Storm and Naastepad state that “the ‘natural’ capitalist order needs a reserve army of the unemployed (euphemistically called equilibrium unemployment)” (220). At least with respect to Friedman's natural rate concept (to which the authors seem to refer), a reserve army is neither existent nor necessary. People are voluntarily unemployed and do not need any reserve army to keep their wage claims in check—at best there are no wage claims at all as the market is perfect and everyone is a price taker. Of course, no one has to agree with Friedman's theoretical framework, but one should avoid to attribute farfetched claims to a school of thought and to call arising contradictions from these statements “Friedman’s dishonesty” (221).

12Instead of criticising so called mainstream economics, I would have found it important that the authors address other central questions on how to implement their policy proposals of increasing demand, higher employment protection, and so on: For example, how does structural change (more services and less industrial production) alter the Kaldor-Verdoorn coefficients? Is there an end to the virtuous cycle of demand, output and productivity growth? If yes, how much expansion of demand would be optimal? Is there an optimal rate of unemployment? Is there an optimal rate of real wage growth? Shouldn’t we worry about ending up in a purely rent-seeking economy? How should the proposed demand expansion be implemented? To be provocative: Would it not be sufficient to aim at a constant growth rate of the money supply? Instead of distributing productivity gains via rising wages, let us distribute them in the way of lower prices. With an ongoing growth of the nominal supply of money (or even with no growth at all after a first stimulus), the real money supply would rise indefinitely, increasing demand and productivity again and again. Unfortunately, the authors missed the opportunity to completely convince me as a sceptical reader that their policy proposals are feasible. Instead I am left alone with the impression—and now I might be exaggerating—that we simply “need more G” (Krugman, 2009).

13Another example for a short cut in favour of a certain political message is the discussion of “the social relations of production” (86ff.). The main result of this part of the book is that tighter labour market regulation will have beneficial effects on productivity growth. I will shortly point at one example to show what bothers me about this result, even though it is not the result as such but how it is being derived: The influence on workers’ willingness to invest in (firm-specific) human capital (18f., 230) is assumed to depend positively on the strength of labour market regulation. Yes, without doubt this positive association is quite intuitive. However, as an economist, I would have favoured to first be persuaded that investment in (firm-specific) human capital without employment protection is less than optimal, as for example external effects are not internalised, and that there is no other solution than state intervention, which is, in this case, labour-market regulation. I imagine that firms being aware of this problem will offer long-term contracts to employees working in crucial parts of the firm. If not for the sake of the worker, then at least for the sake of the firm as the firm receives a revenue in the way of highly skilled and specialised labour which might pay off in the form of a competitive advantage. Thus, more emphasis should have been put on the problem of market failure and the necessity of government intervention. In general, I would have wished a deeper discussion on why advantageous “social relations of production” seem to be mostly dependent on a general governmental labour market regulation and are not achievable on a free market in the way of individually offered long-term contracts.

14So the main question is, of course: Should you spend your precious time and money on this book? The answer, as always in economics, is as usual: It depends. As concerns the questionable discussion of mainstream economics, this book should not be considered by anyone. If you just finished your Bachelor in economics, then my advice would be to postpone reading the book and get a balanced view of modern macroeconomics first. Then you are encouraged to read it and decide by yourself. If you are in general interested about different approaches to economics and economic policy, then this book might be a candidate for your reading list. If you regard yourself to be a mainstream economist, you may want to consider reading the book. The core of the argument is most interesting and valuable. Unfortunately, the presentation of the arguments is very debatable. As a compromise, anyone interested in their research may want to have a look at the published journal articles first on which the book builds (Naastepad, 2006; Naastepad and Storm, 2007; Storm and Naastepad, 2008; Storm and Naastepad, 2009a, b, c)—which also show that their research is indeed very promising and acknowledged in the scientific community.

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Blanchard, Olivier and Justin Wolfers. 2000. The Role of Shocks and Institutions in the Rise of European Unemployment: The Aggregate Evidence. The Economic Journal, 110(462): C1-C33.

Krugman, Paul. 2009. An Institutional Economics Prize. Paul Krugman’s Blog at the New York Times (October 12).

Naastepad, C. W. M. (Ro). 2006. Technology, Demand and Distribution: A Cumulative Growth Model with an Application to the Dutch Productivity Growth Slowdown. Cambridge Journal of Economics, 30(3): 403-434.

Naastepad, C. W. M. (Ro) and S. Storm. 2007. OECD Demand Regimes (1960-2000). Journal of Post Keynesian Economics, 29(2): 211-246.

Pflueger, Carolin. 2012. Review of: Macroeconomics Beyond the NAIRU by S. Storm and C. W. M. Naastepad. Journal of Economic Literature, 50(2): 523-524.

Storm, Servaas and C. W. M. (Ro) Naastepad. 2008. The NAIRU Reconsidered: Why Labour Market Deregulation May Raise Unemployment. International Review of Applied Economics, 22(5): 527-544.

Storm, Servaas and C. W. M. (Ro) Naastepad. 2009a. Labor Market Regulation and Productivity Growth: Evidence for Twenty OECD Countries (1984-2004). Industrial Relations: A Journal of Economy and Society, 48(4): 629-654.

Storm, Servaas and C. W. M. (Ro) Naastepad. 2009b. The Costs of NAIRUvianism. Challenge, 52(5): 55-76.

Storm, Servaas and C. W. M. (Ro) Naastepad. 2009c. The NAIRU, Demand and Technology. Eastern Economic Journal, 35(3): 309-337.

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Johannes A. Schwarzer, « Servaas Storm and C.W.M. (Ro) Naastepad, Macroeconomics Beyond the NAIRU  », Œconomia, 3-2 | 2013, 345-350.

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Johannes A. Schwarzer, « Servaas Storm and C.W.M. (Ro) Naastepad, Macroeconomics Beyond the NAIRU  », Œconomia [En ligne], 3-2 | 2013, mis en ligne le 30 janvier 2014, consulté le 25 avril 2017. URL :

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Johannes A. Schwarzer

University of Hohenheim, Institute of Economics

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