A PLOG is a ´Persistent Large Output Gap´. Read: a long period of high unemployment. Literature about PLOGs tries to mitigate one of the ideas of economic orthodoxy, especially the unsubstantiated idea that lowering high post-economic crisis unemployment will fuel inflation. According to this literature, which is quite empirical, it doesn´t. However, this somewhat older literature does not yet consider the post-2009 Euro Area experience. Here, I will propose an updated definition of PLOGs, to enable economists to consider the post-2009 EU experience in a sound framework: EU-PLOGs (Extra Unordinarly Persistent Large Output Gaps), The reason to do this is the duration of PLOGs in Europe (Figure 1 and 2). In Spain, unemployment is still 11%. In Greece, employment is still not
Topics:
Merijn T. Knibbe considers the following as important: Economics, economy, EU, eu-plog, Finance, finland, Greece, inflation, news, persistent-large-output-gap, Spain, Uncategorized
This could be interesting, too:
John Quiggin writes RBA policy is putting all our futures at risk
Matias Vernengo writes Inflation, real wages, and the election results
Peter Radford writes The Geology of Economics?
Lars Pålsson Syll writes Årets ‘Nobelpris’ i ekonomi — gammal skåpmat!
A PLOG is a ´Persistent Large Output Gap´. Read: a long period of high unemployment. Literature about PLOGs tries to mitigate one of the ideas of economic orthodoxy, especially the unsubstantiated idea that lowering high post-economic crisis unemployment will fuel inflation. According to this literature, which is quite empirical, it doesn´t. However, this somewhat older literature does not yet consider the post-2009 Euro Area experience. Here, I will propose an updated definition of PLOGs, to enable economists to consider the post-2009 EU experience in a sound framework:
EU-PLOGs (Extra Unordinarly Persistent Large Output Gaps),
The reason to do this is the duration of PLOGs in Europe (Figure 1 and 2). In Spain, unemployment is still 11%. In Greece, employment is still not back to its pre-2009 level (Greek employment was based on demand fuelled by unsustainable private and public borrowing, showing up as a massive current account deficit, yes, but that does not mean employment was unsustainable high).
Figure 1. Extra-Unordinarily Persistent High Unemployment in Spain.
Figure 2. Employment and Extra-Unordinarily Persistent High Unemployment and Limited Employment in Greece. Source.
The literature defines PLOGs as follows:
We define an episode of interest as at least eight consecutive quarters of negative output gaps exceeding 1.5 percent in absolute terms. This definition captures two key elements of the constellation we are interested in: a large output gap, and one that persists for a significant period of time.
According to this article,
Among the 15 countries in our initial data set, all but Norway feature at least one such PLOG episode; several countries feature two episodes; and Canada three. The length of these episodes varies between 9 and 25 quarters. On average, a PLOG episode lasts a little more than three years, with an average output gap during the episode of 3.3 percent.
In the EU, however, unemployment in Spain and Greece is still 10% and over, one and a half decades after the Great Financial Crisis. In Greece, employment is, after fifteen (15) years, still below its 2008 peak. In Spain, it is only barely above this level. In both countries, a decline in unemployment by 10%-points did not lead to any kind of noticeable inflation (the recent bout of unemployment was global in nature and can, hence, not be ascribed to the domestic situation of either country). I will thus define EU-PLOGs as
episodes of at least 80 quarters with output gaps, measured as (Headline Unemployment – 3,5% > 3%)
The 3,5% is a relatively high estimate of friction unemployment. The existence of EU-PLOGs means that household consumption, public consumption, private fixed investment, public fixed investment and net exports all have to increase (China! ´Les trentes glorieuses´!), financed by increases in nominal income and only to an extent, which limit is set by the growth of nominal GDP, by debt. Limiting one of these will restrict all of these. Credit is guided to estimated economic bottlenecks (follow the prices and laments of teachers and, medical staff, and entrepreneurs).
These are not the only examples of EU-PLOGs. East Germany also experienced one (figure 3 and 4). East German women: 16 years of 15%-plus unemployment.
Figure 3. Extra Unordinarly Persistent German Unemployment Rates. Source.
Figure 4. German employment rates. Source.
Finland still experiences one (Figure 5) three decades after a financial crisis. In none of these cases, a decline in unemployment led to a noticeable increase in inflation.
Figure 5. Unemployment in Finland. Source.
Implicitly, I´m restricting the concept of an ´output gap´ to unemployment. The use of the stock of capital has not been included as during the typical time of an EU-PLOG, the stock of capital can be adapted to the number of people able and wanting to work and their skills as well as to demand for all kinds of services and goods, like health care, vacations, ´AI-fuelled Ads´-free internet experiences and whatever.