Question

Describe the inherent struggle between Economic Growth and Unemployment. Why are these two constantly at odds? Explain thoroughly. What is the most ideal Unemployment Rate, and why? What would be the future outcomes for the economy if we created too many jobs and the Unemployment Rate dropped to low?

Answer 1

Economic growth and unemployment are related because the two concepts are intertwined. The level of unemployment in an economy may affect the rate of economic growth, while the level of unemployment is also an indicator of the state of the economic growth of an economy. If economic growth is to be sustained, the general level of employment must not fall below a determined level. The moment the level of unemployment falls beyond this desired level, it becomes a detriment to economic growth.

This link between economic growth and unemployment can be explained in terms of the necessary output of services provided by employees needed to sustain an economy and to promote economic growth. When there is a high level of unemployment, the level of output also decreases due to the reduction in the number of workers contributing to the output. This correlation can be drawn from the fact that the level of unemployment is highest during periods of economic downturns. The opposite is in the case where there is a boom, or period of growth, in the economy.

Another link between economic growth and unemployment is the fact that unemployment is one of the macroeconomic factors used by economists and other interested parties to measure the rate of growth or the current health of the economy. When the unemployment level starts to drop, it is usually in connection to other macroeconomic factors like an increase in demand for goods and services, which serve as the catalyst for the increase in employment. For example, when customers start to place a lot of order for products, a manufacturing company will hire more workers to keep up with the pace of demand. When the demand drops, these workers will be laid off as the company sheds unnecessary weight in order to conserve resources.

Economic growth and unemployment can also be seen in the manner in which unemployment deprives the government of necessary resources needed to develop the economy. When workers are unemployed, they will not earn any money, and the government will lose the income tax it would normally gain from such workers. Instead, the government might have to expend resources that could have been allocated to other developmental projects in the form of various types of welfare for the upkeep of the unemployed workers. Such welfare may be in the form of unemployment checks, food stamps and medical care.

Some of the effects of unemployment are immediate and obvious. When unemployment increases, both state and federal governments pay increased unemployment benefits. These are not inconsiderable. Even in February of 2017 -- with the unemployment rate hovering around 5 percent -- unemployment benefits that include food benefits and Medicaid totaled $2.96 billion for the month.

Even more significant in the U.S. consumer economy are the chained consequences of these increased benefits, which require the government either to borrow money to pay these benefits, and by doing so, also deferring the costs into the future or reducing spending in other areas. This is a compensatory strategy, but it can make a bad economic situation worse. An historic 1967 paper on the relationship between unemployment and economic output by Yale economist Arthur Okun, concluded that even a 1-percent increase in unemployment reduced the U.S. GDP (Gross Domestic Product) by 2 percent, which has a multiplier effect of more than 100 percent. A 2017 paper issued by the St. Louis Fed on Okun's law -- as it has come to be known -- noted that this ratio "holds true 50 years later."

A 3 percent to 4 percent unemployment rate is a reasonable goal for policymakers to embrace. Recent labor markets developments, including mismatches in the skills of workers and jobs, extended unemployment benefits, and very high rates of long-term joblessness, may be impeding the return to “normal” unemployment rates of around 5%. An examination of alternative measures of labor market conditions suggests that the “normal” unemployment rate may have risen as much as 1.7 percentage points to about 6.7%, although much of this increase is likely to prove temporary. Even with such an increase, sizable labor market slack is expected to persist for years.

The “natural” rate of unemployment cannot be measured directly, but must be inferred from other information. The Congressional Budget Office regularly reports its estimates of a closely related concept, NAIRU, which stands for non-accelerating inflation rate of unemployment (CBO 2011). The CBO currently estimates that the NAIRU is 5.2%, about half a percentage point above its estimate of 4.8% immediately before the recession. But, if the labor market has experienced significant structural changes in recent years, the CBO estimates may not be good guides for the current situation. Therefore, we examine four alternative estimates of the natural rate based on labor market indicators that allow for a broad set of time-varying influences.If we created too many jobs and the Unemployment Rate dropped to low then the State will probably low taxes thus forcing everyone, both employed and unemployed, to experience a gain of disposable income. Again that gain in disposable income will give growth effect, and more money will be spent in the economy that means the growth of the system.

The Bureau of Labor Statistics reported that the economy added 200,000 jobs in January. With modest downward revisions to the prior two months data, this brings average growth over the last three months to 192,000. This is slightly more rapid than the 176,000 average over the last year. The picture on the household side was mixed, with the both the unemployment rate and employment-to-population ratios (EPOPs) remaining unchanged.

However, while the unemployment rate for whites dipped by 0.2 percentage points to 3.5 percent, the black unemployment rate jumped 0.9 percentage points to 7.7 percent, putting it just a hair under the 7.8 percent rate of January, 2017. This was associated with a 0.6 percentage point drop in the employment rate.

This is disappointing since the 6.8 percent rate in December was the lowest on record. (The data only go back to 1972.) ... The employment data for blacks are highly erratic and it is likely that much of this change is driven by measurement error, but it is nonetheless discouraging to see this reported jump.

The percentage of unemployment due to voluntary quits, a measure of people’s confidence in their labor market prospects, was unchanged at 10.9 percent. It stood at over 12.0 percent before the recession and peaked at over 15 percent in 2000.

Less-educated workers continue to be the biggest job gainers. ...

One item suggesting slower job growth going forward is a drop in the diffusion indexes, which show the percentage of industries intending to add jobs. The overall index fell from 65.5 to 57.9, while the manufacturing index fell from 60.5 to 53.9.

The story is mixed on the wage side. The overall average hourly wage is up 2.9 percent year-over-year, a modest acceleration from its prior pace. However, the average wage for production and nonsupervisory workers, a group that excludes many higher-paid workers, rose just 2.4 percent over the last year. By industry, the fastest growth appears to be in restaurants, with higher wages driven both by minimum wage increases and a tightening of the labor market. Wage growth in manufacturing, at 1.9 percent, lags the overall average, as does the 2.2 percent growth in retail.

Overall, this is a positive picture of the labor market with the jump in wages being especially good news. However, there are discouraging signs, such as the drop in the diffusion indexes, the small percentage of unemployment due to voluntary quits, and of course, the rise in the black unemployment rate. In addition, there was a 0.2 hour drop in the length of the average workweek. This led to a drop in average weekly pay, despite the higher hourly rate. This is most likely a blip in the data, but one that is worth noting.