Question

Describe some of the factors that may lead to lower profits when unemployment is too high;

Similarly, describe some of the factors that could lead to lower profits when unemployment is too low.

Finally, explain how this limits the ability of policy-makers to push for full employment and instead may give rise to cycles of rising employment followed by lowering employment.

Answer 1

Low profits and high unemployment can be due to reduced demand for the goods. Since, unemployment is high, there would be a large population without jobs while those in jobs would start to save money for the future. Hence, in a such a case, the demand for the industrial goods will be small and hence, despite low labour costs, there would be no profits since the goods are not being sold. Another factor could be if there is a situation of stagflation where there is unemployment accompanied by high inflation. This high inflation will reduce the real profits of the capitalists.

Low profits during periods of low umemployment could be due to higher wages paid to the employees. In this case, the wages eat into the profit share of the capitalists. Another reason for the low profits could be that due to higher employment, the trade unions become stronger and they bargain for higher wages due to their power. Hence, it will further raise the wages and reduce the profits. Finally, low unemployment means that there is tightening of the labour market. Hence, the wages will rise and costs will rise and this will give rise to higher inflation (supply-side inflation). High inflation will reduce the real profits made by the capitalist.

Hence, the presence of trade unions and tightening of labour market during times of low unemployment will lead to higher wages and higher inflation. High inflation will reduce the purchasing power of the consumers and will inturn lead to low demand. Hence, trying to push for full employment will lead to higher inflation and reduced profits. This will lead to unemployment and hence lead to cycles of rising employment and followed by lowering employment. The situation describes the Phillips curve.