Written By: Emily Newcomer
An average or good rate of unemployment is between 4.5% and 5% (Amadeo). As of right now, the unemployment rate in the U.S. is 3.9%. While it is common to believe that an economy should strive for the lowest possible unemployment rate, a rate too low or of 0 is not feasible nor desirable. Lowering the unemployment rate should not be a concern of the economy, however, I believe that quite the opposite should be prioritized. The harmfully low unemployment rates causes hardships on employers, inefficiency to increase, and wages to stagnate.
First of all, there are more jobs being created than the amount of people able and willing to work. Finding and hiring a capable employee with the right skillset is becoming increasingly difficult for employers as job opportunities are vast and most people must be enticed before even considering an offer. In fact, according to Josh Bersin, an analyst and global researcher, “...[recruiters] are finding a 40% increase in time to hire.” This is because candidates for a job will often disappear when a better offer comes along, leaving businesses to scramble to recruit new candidates. Additionally, the gap between a desired worker and the skill set of a person looking for a job widens. More specifically, about 1/3 of the labor force doesn’t match the required skills for available jobs (Hormann). Competent workers are already employed, leaving employers desperate and forced to hire a person that only slightly fits in with the job description.
Furthermore, with each additional worker hired, efficiency decreases. When the cost of hiring another employee outweighs the productivity, slack appears in the labor market (Hankin). On the graph to the right, the slack, which is also called the output gap is calculated. It is measured by subtracting total unemployment (U3) from the combination of total unemployment, underemployment, and hidden unemployment (U6). At a certain point, when total unemployment decreases, the output gap increases, creating more slack or inefficiencies in the economy. Some unemployment is beneficial, even necessary, to create a labor market that can reach maximum efficiency and productivity.Lastly, lower unemployment rates should supposedly increase workers’ bargaining power, however this is not the case. As mentioned previously, economic slack decreases efficiency in the market. This slack also causes subdued wages, or wages that don’t increase in proportion to inflation. During the recovery from the Great Recession of 2008-09, workers had very little bargaining power over wages as the labor market had too much slack and people were wary to quit their jobs. Although the job market has expanded since then, the state of wages is still argued to be the cause of the erosion of workers’ labor market leverage and the growing power of employers (Bevins). Wages, bargaining power, and unemployment rates are all interdependent, and a better balance needs to be found because excessively low unemployment rates are a factor of stagnated wages.
While the economy could be worse-off with unemployment rates reaching 20%, like in the Great Depression, it could also be better-off with a slightly higher rate that falls within the average unemployment rate. By implementing changes that would cause the unemployment rate to marginally rise, then productivity, efficiency, and wages could all increase.
Works Cited
Amadeo, Kimberly. “Natural Rate of Unemployment, its Components, and Recent Trends.” The Balance, 16 Nov. 2018, https://www.thebalance.com/natural-rate-of-unemployment-definition-and-trends-3305950Bersin, Josh. “The Ugly Side to Today’s Low Unemployment Rate.” Forbes, 3 July 2018, https://www.forbes.com/sites/joshbersin/2018/07/03/the-ugly-side-to-todays-low-unemployment-rate/#7a3406e63e99
Bevins, Josh. “A Long Spell of Very Low Unemployment Would Raise Wages.” Economic Policy Institute, 20 July 2018, https://www.epi.org/blog/a-long-spell-of-very-low-unemployment-would-raise-wages-even-in-the-face-of-employers-monopsony-power/
Hankin, Aaron. “The Downside of Low Unemployment.” Investopedia, 4 May 2018, https://www.investopedia.com/insights/downside-low-unemployment/
Hormann, Bill. “Low Unemployment Means Fewer Skilled Workers Available.” 13abc, 6 Oct. 2018, https://www.13abc.com/content/news/Low-unemployment-means-fewer-skilled-workers-available-495352691.html
I always knew that having an unemployment rate of zero was bad. But I never knew that it was bad to have an unemployment rate really close to zero. Now realizing that our economy is better off at a slightly higher unemployment rate is a shocker to me, but makes me feel better that it will increase productivity, efficiency and wages for workers.
ReplyDeleteIt seems somewhat counter intuitive that we don't want the unemployment rate at 0%. However, this makes sense as if the rate gets too low, not enough people are looking for new/better jobs. This might make the economy become stagnant and the workers would not be learning any new skills. Later on, this might lead more workers to become structurally unemployed as they have not learned any new skills from not taking any new jobs. This is why it is good to have between a 4 & 6% unemployment so that people are looking for new jobs and are always learning new skills.
ReplyDeleteI agree with the fact that the unemployment rate could be better than it is at right now. But where is the point where the rate is too low and we do not have enough people looking for better work or more jobs are being created. I think the US is doing really well right now and we need to make sure that we are keeping productive workers so the rate can stay low.
ReplyDeleteI really like the topic that you choose for your blog post. This is such a great topic that is not talked about enough in the news/media. Everyone always strides to get the unemployment rate as close to zero as possible, but there seems to be no conversation when the unemployment rate gets too low. When this happens there can be a variety of negative effects the economy, that may lead to some detrimental effects. I really like how you brought up the lack of people willing to work in the workforce. There are so many jobs that are being created still, even though we are far out of the recession that occurred in 2008. Another downside to having the unemployment rate so low that means that there is lack the frictional unemployment that is occurring. This means people are not moving from job to job, working up the ladder, or moving to better jobs that might have better pay. This is another negative effect that can cause people to have a decreased purchasing power. That can lead to number of more negatives effects, hurting the economy even more.
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