Well, not everyone… but let’s say that unemployment was knocked down to under 1%, so that 99% of everyone who wanted a job had one.
What would be the economic effects of this? Would it cause a jump in salaries (since there would be greater competition among companies for labor)? And if so, would that lead to higher prices and inflation?
If that is also true, then at what level would unemployment have to stay to maintain a decent economy but not have rampant wage (and price) inflation? IOW, what level of unemployment is good?
Back in the 1970s in the US, this became a major issue. The post-60s unemployment rate started to creep up and this caused a lot of worry. So the politicos starting spinning: “Oh no, 4% unemployment is considered full employment, anything lower than that causes inflation.” Yes, very low unemployment causes inflation, but not 4%. In the last 20 years, some states have had rates routinely below 3%, barring recessions, with very low prices on key commodities like housing.
Since the economy is always changing its nature (remember when steel and shipbuilding were considered vital?), and economics is not at all an exact science, it comes down pretty much to people waving charts and arguing over how low of an unemployment rate would be a bad thing. No definitive answer.
Cetaris paribus a very low unemployment rate would tend to signal an economy which was rapidly growing. Normally, such an economy produces several “counter trends” which would tend to increase unemployment:
Since, "employment’ reflects the balance of labor supply and demand, a very low rate would reflect high demand, and lower supply. Thus, wages would tend to rise.
This would create addtional incentives for companies to expand oversea’s “out scourcing”. In addition, it might cause an increase in immigration (legal and illegal) to take advantage of the better paying jobs at the bottom.
The fed would probably increase interest rates which would tend to “slow” the economy causing unemployment rates to again increase.
Of course many other factors would also come into play. Even seemingly positive ramifications such as increased productivity can result in increased unemployment since greater productivity means that fewer workers (or the same amount) can accomplish more work (thus reducing the need to hire more workers).
This is not only a Great Debate, this is the Great NAIRU Debate, which hotted up back in the low-unemployment days of the late '90s. To wit: what, if any, is the lowest Non-Accelerating Inflation Rate of Unemployment (NAIRU) that the economy can sustain?
Yes, it’s generally believed that some non-zero unemployment rate will be low enough to start an inflationary spiral, but nobody’s quite sure anymore what that rate is. Unemployment at some points in the '90s dipped below what was commonly believed to be the NAIRU without setting off inflation.
(The NAIRU, by the way, is one of the arguments for “welfare-state” provision of some social benefits. To wit:
if we need to keep the economy healthy and un-inflationary by restricting the employment supply so that only about 19 in 20 (or thereabouts) of people who want to work can get jobs,
and we use techniques like federal tweaking of interest rates to achieve those desired conditions,
then we’re essentially condemning a small percentage of workers to unwanted unemployment to improve prosperity for the rest of us,
and we owe those unemployed workers some assistance to compensate for that.)
Kimstu: couldn’t one, from an economic standpoint, consider people on the dole as at least somewhat employed? They wouldn’t be aiding production, but they would be spending and thus adding to inflationary pressures. Add as prices rise the amount of the transfer payment would, in a perfect world, be increased to account for rising prices. So wouldn’t these also at least marginally add to the inflationary pressures that one is trying to avoid by keeping a certain number of people unemployed?
ShibbOleth: *couldn’t one, from an economic standpoint, consider people on the dole as at least somewhat employed? They wouldn’t be aiding production, but they would be spending and thus adding to inflationary pressures. Add as prices rise the amount of the transfer payment would, in a perfect world, be increased to account for rising prices. *
Well, IANAEconomist, but I think that the way it supposedly works is that if you have people on the dole with a lower standard of living than even low-paid workers, they’re still going to be competing for employment in order to better their condition, so they’ll continue to put downward pressure on wages. Presumably the downward tug on wages overwhelms the upward push on prices. Any actual economist is welcome to step in here and explain to me what the hell I’m talking about.
I don’t know what IOW means, but I think a level of zero would be good, each percentage increase would be worse, until 100 would be the worst.
To say 1% or 5% or 10% or 20% can be have-nots to make the haves happy is a selfish dream. We’ve seen monarchs who piled all the wealth on a thin minory of the society, and they are called despots. The despotic nature of greed is still there even when the percentage of haves increases.
Yes, but why would you consider someone who is unemployed a “have-not”? Unemployment isn’t an economic death sentence. People change jobs all the time. If there is a gap between the time you left your first job and started your second job then you are unemployed for that time. Let’s say your average person works for 50 years, and they change jobs an average of 4 times, and have a gap of 3 months between jobs. That’s 12 months of unemployment in 50 years, or a 2% unemployment rate. Suddenly a 2% unemployment rate doesn’t seem so bad.
The fallacy is in assuming that if we have a 5% unemployment rate that those unemployed people will be unemployed forever. But unemployed people get jobs, and employed people leave jobs. The 5% that were unemployed this year aren’t usually the same people that were unemployed this time last year.