BUSINESS COSTS, GOVERNMENT REGULATIONS, AND THE NAIRU
As discussed in Chapter 2, the jobs summit centered on skill mismatch as the principal culprit in Europe's and America's high unemployment. Improved training and retraining programs are the logical response to such a malady The chapter concluded that that diagnosis may very well be wrong. It was suggested that the available evidence cannot be used to justify major increases in training and retraining programs. Improved education is a must. However, spending billions of dollars on education and training programs that will not accomplish their goals will only further erode confidence in our government.
If the jobs summit focused on the wrong things, then what are the major causes of the increased NAIRU among the G-7 nations and, more specifically, in the United States? The search in this chapter begins at one of the most basic levels--an analysis of business costs.
How can business costs affect the NAIRU? Increases in business costs that do not somehow increase productivity are ultimately passed on to consumers in the form of higher prices. These price increases get built into various cost-of-living measures like the Consumer Price Index (CPI). Increases in prices lead to increases in wages either through formal wage indexation to the CPI or more informally through demands for wage increases to keep up with inflation. As wages increase, businesses again experience increased costs and raise their prices again. Inflation begins to rear its ugly head. If the cost increases that initiated the inflationary impulse turn out to be permanent and are therefore added to the cost structure of the economy, then businesses, in effect, require more inputs to produce the same level of output. Productivity by definition is reduced.