Mainstream economists don't pay much attention to the employment structure under stagflation and near-stagflation conditions. Among those employed you find a larger proportion of people who are in the informal sector. I would classify most low-income countries as in the near stagflation category because the structures of those economies have a lot of rigidities in resource mobility and expectations are easily transmitted into the nominal economic outcomes. Hence the nominal fluctuations of economic variables such as GDP per capita and money supply are negatively correlated with the real ones, which isn't the case in high income countries. These "irregular" relationships between nominal and real variables haven't been clearly understood by these mainstream economists.
In an attempt to find a solution to this "problem", economists allude that these low-income countries' economies aren't normal hence structural reforms should be taken by them. This means that the economic landscape must be filled by big industrial and service companies. These corporates would then become the largest employers in the country. As a result of the market behavior and cooperation among these companies in the face of various dilemmas; it means economic outcomes caused by expectations and other undertakings can be estimated.
Hence the structural change which results in a situation were there is positive correlation between nominal and real variables is advocated by mainstream economists. In some instances this change caused shocks to occur in the economy resulting in lower household incomes and an increase in the cost of living. All this, results in poverty. This was evi9dent in Latin American and African countries. Other people contend that the structural change was responsible for the exceptional growth in the Asian economies. When we are talking about this structural change we are specifically referring to the introduction of free-markets freeing the international trade of a country.
Going back to the unemployment trends, stagflation makes the labor markets more dynamic than in an non-stagflation economies. This is because in an attempt to stabilize real household income, individuals tend to engage in different economic activities in a fashion similar to a non-zero sum game. Because of rigidities in the product demand and supply markets, companies are very much not flexible in offering a stable real income to individuals. Individuals will now try out new ventures of stabilizing income whether it's a non-arbitration undertaking or engaging in speculative activities, at the same time competing among themselves in those markets.
This dynamism in the labor markets makes it worthwhile to find employment in informal markets where each individual has got freedom to maneuver strategically insofar as to stabilize real income. These informal markets are usually not included in national employment accounting because of difficulties in counting these folks and they not being keen on being officially counted by authorities in an attempt to evade taxes, regulations and other reasons. Therefore stagflation offers a new paradigm view to analyze how employment levels fluctuate and also move in the real economy.
The specifications of the models of mainstream economists aren't robust enough to model employment trends in stagflation economies. I consider them as degenerate models which analyze the economy. They are degenerate because they are only suited for the economies of capitalist countries. Therefore there is more room for research in the study of employment models. Until such research results in convincing results, the current models are going to be dominant for the time being even though there are clear limitations in their use.
The issue of unemployment which affects household incomes of countries in poverty stricken countries needs to be analyzed in a more objective manner than is currently happening. Like I highlighted above, low-income countries, most of which have got stagflation-like and stagflation conditions have got employment levels which are very dynamic and influence more economic variables than high–income countries. Therefore it is important to note that convergence in income levels between high and low-income countries will never be achieved without clearly analyzing how unemployment behaves in all the different states of the economy (including stagflation).
I sometimes ask myself questions of why are some models still considered relevant even though they are useless in modeling the real world? The real world is a system in which there are numerous inter-related activities and when you want to model a portion of it you have to make assumptions on the other parts. Is this the problem? Some like these models because they are simple and can give you a clear thinking on what goes around in this world. Why not make an all-round model which models the economic activity of the whole world even though it's going to be complicated? This is because these simple models aren't useful when they can't forecast the economic future.
Positive results from this research are going to have profound effects. Some of the current literatures like the Phillips Curve and Taylor Rules will be shaken o the core. If you really want to see the most profound effect, the Dynamic Stochastic General Equilibrium (DSGE) will have to also be shaken. These DSGE models have lasted their useful lives. They failed the test during the recent Great Recession by failing to predict it and even offering credible solutions to problems caused by the crisis. But the economics profession is just stubborn insofar as to being robust enough to find new models which are practical. Maybe the solution now is too difficult to be found by those entrenched in the mainstream. Who are those? Basically those who were schooled in the Anglo-Saxon influenced universities be it those in academia or business are the ones heavily entrenched.
They are heavily entrenched because their economic ideologies do not clearly expose the fault lines of their thinking. There are always excuses on why their models fail hear and there and at the end of the day you hear the model has passed the test. Sometimes propaganda plays a part in the dominance of the Anglo-Saxon influence in the mainstream. But who cares anyway. These guys dominate because they are allowed to do so. Hence now is the time to change all of that.
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