The announcement was really about a week ago, but I have not gotten around to posting about this until now. Edmund Phelps is a macroeconomist, so his accomplishments will not mean as much until next semester.
His main contribution is the idea of a natural rate of unemployment, which is a certain level of unemployment that will exist even when the economy is functioning at its potential. He also wrote about the importance of inflationary expectations -- the fact that it matters what people think inflation is going to be in the future.
Phelps is honestly not an economist whose work I know very well, but here is the press release announcing what he got the award for, and here is a summary of his accomplishments by economist Tyler Cowen.
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Edmund Phelps winning the nobel prize for economics is quite a headline in the vast world of economics. Mr. Phelps came up with the idea of a natural unemployment rate and that is significant because it shows that there will always be unemployment. Some people are so hell bent on eliminating the unemployment rate in America and wants to give everyone a job, but according to Mr. Phelps, thats not possible. There will always exist some unemployment rate and there is nothing we can do about it. Mr. Phelps' contributions to the world wide study of economics and he has been well compensated for his efforts by winning the nobel prize for economics.
-Chris Templin
Phelps work has mainly dealt with the natural rate of unemployment and the Phillips curve. The Phillips curve implies that the lower the unemployment rate, the higher the rate of change in wages paid to labor in the economy in the short run. Phelps work involved the long run natural rate of unemployment, which he found to be a vertical line, meaning that there was no trade-off between inflation and unemployment.
http://upload.wikimedia.org/wikipedia/en/4/42/PhilCurve.jpg
-Emliy Spurlock
Edmund Phelps' point that there will always be unemployment is something that i find very interesting. I feel stupid for thinking that unemployment was just people being incompetant, but that is not completely true. "Individual agents have incomplete knowledge about the actions of others and must base their decisions on expectations." This is a quote from the nobel prize article, and it is saying that people's attempt at judging inflation and deflation are usually uneducated, but they also do contribute to inflation. "Inflation depends on both unemployment and inflation expectations." Phelps is saying that people's interpretation of inflation actually impacts it.
-Schulz
So as not to repeat what everyone else has said thus far, I found something else very interesting in the Nobel article. It says "long-run rate[s] of unemployment [are] not affected by inflation ", which, to me, seems odd. Instead, the short run of inflation sets the tone for the future and creates precedents for expectations for "future policy making". Basically i thought this was weird because you would think the short run wouldn't have alot of effect upon the long run of unemployment, but according to Mr. Phelps, it does. This helps us realize that what we do today really does create a huge impact upon the world 10 days or 10 years down the road.
-john schmidt
I would guess Phelpls goes in depth about the reasons why at a full functioning economy there is still a level at unemployment. However, with out going too in depth I can thing of a few reasons why there would be an unemployment rate. People who are disabled, retired, or do not have the drive to work all can contributed to a level of unemployment during a full functional economy. With regard to Phelps’ ideas about people’s presumptions about future inflation, I can understand that if people think there will be inflation in the future then they will buy a lot of goods now in preparation of the inflation. This will cause different firms in an industry to think there is an increase in demand for their product which will lead to the firms producing more goods in the future. However it will be a false demand and many of the products will not be purchased. If the level of accidental production becomes very high then it could cause a large change in the economy because firms will lose a lot of total revenue which could cause the whole economy to plummet.
seth weiland
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