Notes on ‘k’:
A lower k should be expected in recessions because profits fall more than wages do.
A long period of continuing expansion, to the extent it impacts future expectations, should reduce k, as optimistic entrepreneurs push forward their break-even point and lower their mark-up.
An expectation of recession should raise k.
Notes on (w/a) under a "full employment" mandate:
If labor productivity, i.e. ‘a’, has been, and is expected to remain at, 2 per cent per year it may require a 6 per cent level of unemployment to provide price stability. But if recession, by reducing investment and capital accumulation, reduces productivity below 2 per cent, it will take more unemployment to stop the inflation, w can no longer be permitted to rise at 2 per cent and unemployment must be increased to whatever level needed to stop w from rising relative to ‘a’. Consequently, every recession will raise the level of unemployment needed for price stability. This is the crucial phenomenon behind the breakdown of the old Phillips curve.
If the induced recession reduces ‘a’ by more than it reduces w it will raise unit costs and aggravate the inflation even in the short run. If the effects on w are rapid while the effects on ‘a’ are slow (which may be the case because the latter are cumulative results of the diminished rate of investment), the recession may be anti-inflationary in the short run but inflationary in the longer run. |
