Question

The official unemployment rate in this country has been below the natural rate of unemployment (4.5%) for eleven months, which would ordinarily put pressure on wages and create inflation. Yet, the average earnings for nonfarm private employees has only increased by 2.6%, which is marginally better than the inflation rate of 2.13% in the same year. Identify and analyze factors that may explain why high employment rates have not resulted in a very tight labor market.

Answer 1

The first factor is the presence of part-time workers that are also considered as employed by the agencies. It means that those people who are partially employed (or partially unemployed) are not considered as unemployed. It resulted into the official unemployment rate to be lower than the natural rate of unemployment. So, it is the discrepancy in assumption of employed and unemployed people that led to this situation and there is no tightening in the labor market or inflation. The second factor is the time taken up by the economy to recover. Economy has recovered in the last 1 year from the recessionary impacts and firms have started providing the new jobs. Initially there were more supply than the demand of workers, so there was downward pressure upon the wages and employees cannot bargain in the labor market. It is the reason that wages could not increase, neither there is overheating in the economy. The third factor is the presence of structural and frictional unemployment in the economy. It always crates the scope of work at lower wages. So, wages don’t rise sharply.