Question

If you look on Twitter or turn the news on you will undoubtedly see or hear someone discussing the unemployment numbers. Unemployment has been deemed as bad and should be reduced as much as possible. However, there are aspects of unemployment that are indeed good. As you see in the text, full employment will never be 0%. Please discuss why unemployment can be good for the economy and why it is healthy for the economy to have some level of unemployment.

Answer 1

There are number of reasons why some level of unemployment is healthy for the economy.

• Presence of Frictional Unemployment - This type of unemployment encapses those unemployed people who are unemployed temporarily. There are many people who graduate every year. When they start for a job, for the span of time spent job searching is the time they are unemployed. An economy characterised by mproving quality of education and human capital will have certain level of frictional unemployment. Again those people who shift to a better job require some time shifting. This span of time they are unemployed. This shows improving job prospects in the nation. Hence some level of frictional unemployment is a sign of a booming economy.
• Presence of Structural Unemployment - This type of unemployment exists because the production structure is making advances and transforming. People unable to upgrade will become unemployed for a certain time span unless they upgrade themselves or find a different job that suits their skills. So low levels of structural unemployment indicates that there is growth and development occuring in the economy. Higher levels of structural unemployment can be problamatic but the government through proper training programs can solve this problem.
• Moderates Inflation -Certain level of unemployment is required to avoid uncomfortable levels of high inflation. Full employment in the absolute sense can overheat the economy and increase aggregate spending and price levels substantially. Practically there has never been a 0% of unemployment, very low levels of unemployment have overheated economies in the past and caused recession! In the May of 1953, US had a unemployment rate of 2.5%. The reason for this was the Korean war. However this soon caused the recession of 1953. Hence some level of unemployment indicates healthy inflation rates.