I was cleaning the kitchen the other day and had the TV on. Some candidate (no idea which or even what office he was running for) claimed that if elected he’d get the unemployment rate down to 0.
As I understand it, there are different ways of measuring unemployment, but* the percentage of the labor force that is out of work, able to work and looking for a job *seems to be a fairly standard definition. Given this definition, what is the optimum unemployment rate?
0%, what advantage is there to society for able-bodied people to not contribute to the workforce?
There’s also something I hear sometimes called the “real” unemployment rate which includes people who can work but aren’t seeking work, either because they don’t want to work or have given up trying to find employment. That should probably be considered as well.
I’m not sure whether you’d factor in retired people as well. Including someone in his 60s collecting Social Security and/or a pension, or some young guy who struck it rich and doesn’t need to work. Technically they have the same impact on society as anyone else not being productive, but it feels wrong somehow to count them too.
Wikipedia’s article on Full Employment has this to say about 0% employment.
There’s much more info in the full article here:
What precisely the optimum value is is a Great Debate, but it probably isn’t 0%, because 0% unemployment makes growth impossible. Suppose you did have an economy where the rate really was 0%, and now suppose that someone comes up with a good idea for a new business. Whom does that entrepreneur hire?
I guess another way to look at it, from a practical point of view, is that you’ll only achieve 0% unemployment by forcing people to work and/or force businesses to hire people, and that opens up new kinds of problems.
Historically, full employment has an unemployment rate of five percent. That’s because there is always a percentage of people starting and leaving positions.
What needs to be clarified is what is it to be “unemployed.” That has changed quite a bit (i.e., diluted) since the 1980s Reagan era. The “official unemployment rate” is the U-3 rating. Many argue the U-6 rating is a more accurate picture of unemployment.
An unemployment rate of 0% would mean that there was a shortage of workers. It would mean that the moment someone got qualified to work they would get work regardless of how “employable” they were. It would also mean that people either stayed in their job for their whole career or they only switched jobs if they already had a job to go. If someone decided to sell their house and move to a different state they would be hired on the day they started looking for work. For this situation to occur there must be a multitude of vacant jobs all over the country which means not enough workers which means out of control wages and ultimately inflation.
Gotcha. As someone who works at a place where it’s hard to keep people in certain positions (they often leave for higher-paying jobs right after their training ends) I can see how this would not be at all optimal.
Umm,Atamasama, this forum is for factual answers. You should know at least something about a subject before answering.
In a modern society, an unemployed pool is seen as being both inevitable and indispensible. The unemployed pool is what gives the labour market flexibility. If everyone were employed, then the only way that an employer could get another worker would be to offer more money than that worker’s current employer, leading to rapidly spiralling wages, massive inflation and a level of uncertainty that would make offering most services impractical.
In a system with 100% employment, which you claim is optimal, what happens when the local hospital needs to open a new wing? To employ a janitor, the hospital needs to offer more money than the local fast food restaurant is offering, In fact, because janitor is less desirable work, they will need to offer substantially more more. So if McDonalds is offering $10 an hour, the hospital will need to offer $15. But McDonald’s isn’t going to go short staffed, so we rapidly see a bidding war between the hospital and McDonalds for a 25 year old with no education or skills.
That will repeat for every single job in the country, and the result will be ever-increasing costs for health care and food, as well as every other commodity in the country.
Then we have the problem that nobody will invest in a factory if they know that wages are spiralling upwards and they can’t guarantee that their entire workforce won’t be wooed away next week by higher wages offered by a competitor.
0% unemployment means that labour has become limiting on economic growth. That’s not a good thing for anybody. Like every other essential commodity, their needs to be a surplus to keep the price affordable. No surplus and the commodity becomes a luxury item that only the wealthiest can afford. that might sound good, but everyone in the country has to pay for wages. Even janitors have to pay the wages of the people who operate the checkouts at the local market or fix potholes in the local streets. If only the wealthiest can afford to pay for labour then the cost to janitors also increases. In a market with 100% employment the janitor will demand more money for his work, which means the street fixes and checkout chicks will demand more money and the whole thing spirals out of control.
Getting back to the OP, the optimal unemployment rate is controversial, but generally considered to be between 2% and 7%. It also varies depending on the flexibilty of the economy. In terms of economic change when there are large numbers of jobs being offered, a higher unemployment rate s generally optimal. In a static economy when there are few new jobs on offer, a lower rate is optimal.
Essentially you are aiming for an unemployment rate that reflects the people walking from one job to another, rather than people being laid off and not being able to find a job.
Yes, many years ago I recall the number 4% to 5% kicked around. This allowed for people between jobs, people fired, quit, just graduated, hired but haven’t started yet, etc. There is always a certain amount of “churning”. Unemployed is counted as people who are actively looking for work but don’t have work.
When unemployment gets very low, you end up with every other place of business putting out “Help Wanted” signs, and wages for marginal workers start to escalate.
Alberta Canada was notorious for this, during the oil boom before 2008 fast food drive-through window people were allegedly making $16/hr. There was a news item about stores in Calgary reducing hours during the Christmas rush because they could not find enough people. (I think it was the mid-2000’s in Tampa we saw the same ubiquitous “Help Waned” signs around Florida. No wonder Trump had to hire guest workers…)
the thinking is that 0% brings its own set of problems. 4% or so is “comfortable”, there are workers available but anyone who wants to work, can.
A hidden stat that is rarely mentioned is underemployment. Nowadays, people who work 24 hours a week but want to work 40 are counted as employed.
The econospeak term for this is ‘frictional’ unemployment, as opposed to ‘cyclical’ unemployment, which is what you see spiking during recessions, and ‘structural’ unemployment, which is basically folks that flat out don’t have the skills they need to get and keep jobs, but still want/need a job Economists are basically unconcerned about frictional unemployment, but driving the other two to near zero is a reasonable policy goal (somewhat simplified.)
Welll… somebody has to raise the next generation…
Full time parents who stay home rather than plunking the kids in daycare are considered “unemployed”. Nonetheless, I’d argue they very much contribute to a civil society.
If someone is independently rich and chooses not to work I don’t see a problem - they’re self-supporting, and it frees up that job for someone else.
Plenty of able-bodied elderly people live on retirement funds. Should we force them back to work?
I’d also like to point out that the demand the above people have for food, clothing, shelter, entertainment, etc. provide employment for others.
While work is a worthy thing it is not the only thing.
0% unemployment, by the usual definition, wouldn’t make growth impossible or even difficult.
One “easy” means of achieving this would be for the government to offer an absolutely guaranteed job of last resort. Like the Federal Service in Starship Troopers, it would be designed such that every adult, no matter what their skills or disabilities, would have some kind of position available.
Thus, it would be impossible for someone to be seeking a job and not have one available. But in practice, lots of people wouldn’t take that option–they would wait around for something better paying/more fun/better fit to open up. These people would count under other definitions of unemployment, but not the standard one. A new business would always have a pool of skilled workers to pull from.
Another way of looking at it: You have some number of workers, and you have some number of jobs. The more different those two numbers are, the worse it is. But how bad it is depends on which one is higher. Having slightly more workers than jobs turns out to be not nearly as bad as having slightly more jobs than workers, and so it’s best for the system to err on the side of excess workers.
A lot of things in economics work this way. Inflation and deflation are both bad, but even a small amount of deflation is worse than a small amount of inflation. So what controls we have are targeted towards having some small amount of inflation, to decrease the risk of accidentally getting deflation.
They aren’t. In the US, U3 measures people who want work and are looking for it. U6 also includes those who are working less than they’d like (part-timers who want full-time work) and those who want work but have stopped looking (discouraged workers). Adults making a choice to stay home to raise children are not counted as unemployed.
This is correct. The basic rule-of-thumb is this: if you’re not employed but you’d take a reasonable job if one were offered to you right now, you’re going to get counted somewhere in one (or more) of the unemployment metrics. If you wouldn’t take that job because you’re having fun goofing off, or are raising children, or are getting really into your hobby for a while, or whatever, then you’re “not employed”, not unemployed.
They aren’t counted as employed, either. In a sense, they don’t exist. For calculating many benefits, though, the stay-at-home-parent IS counted as unemployed.
So, for the U numbers you are correct. For calculating many forms of benefits I am correct. It all hinges on how you’re defining “unemployed” (The fact there are multiple U numbers show that even for officialdom the definition changes depending on one thing or another).
However, stay-at-home-parents DO comprise a reserve of potential outside-the-home-workers, as they can be induced to seek outside work. A lot of them went to work during WWII, for example. So really, the pool of “people able to work” is a bit more fluid than it might appear.
I think “optimum for whom” is the real question.
I don’t know what you mean about benefits, but it is certainly true that in a tight labor market U6 would start to approach U3, and if wages were being driven up some people would join the work force who aren’t in it now–younger retired people, stay at home parents, perhaps some full-time students.
In the UK, back in the 50s/60’s, we had pretty much full employment. I remember quitting/being fired from one job on a Wednesday, buying the paper on Thursday and finding three interviews for Friday. I was offered all three jobs and started work in the best one on the Monday. These were not high skilled jobs either.
To take up the slack, the government offered incentives to [black] British citizens in Jamaica and they came over by the boatload to take those cleaning and labouring jobs that the locals didn’t want. Today, those jobs are being done by East Europeans and the locals sit around and moan about them “coming here and taking our jobs”.