Introduction
Principles and theories are developed for real-world applications. Economics is a complex mechanism utilized in all aspects of human society. Therefore, to find a proper implementation of theories, it is critical to analyze how the economic concept functions under socio-political policies and influences. Unemployment is considered a key indicator of national economic health as it directly reflects on the efficiency of government policy and the population purchasing potential.
The Concept
Unemployment is a measured number that indicates the percentage of citizens that are seeking work but are not hired or receiving any wages. Therefore, the official statistic does not include those not seeking a job for distinct reasons such as education or illness. Employment is critical to any economy because labor wages drive consumer spending, while unemployment causes a decline in production. The rate is measured by the government via randomized household surveys to calculate the total labor force and the percentage unemployed. This is known as the official unemployment rate. Additional numbers, such as jobs added, are sought from employers.
There are various types of unemployment. Frictional unemployment is caused by time and imperfect information that elongates the process of seeking a job. Cyclical unemployment is dependent on the business cycle during certain periods, such as recessions significantly decreasing employment rates. Finally, structural unemployment is caused by a lack of qualifications in the labor force for the available jobs. This leads to extended periods of unemployment and a potential revamp of the training and education systems. In reality, most of these economic circumstances are impossible to avoid in a free market.
The concept of the natural level of employment in the labor market is essentially a demand and supply model. Supply of labor is relatively fixed, while demand greatly depends on real wages. Lower real wages lead to increased demand. The natural level of employment, otherwise known as full employment, is when the quantity of labor demanded is fully satisfied by supply. As previously discussed, economic realities will result in some level of unemployment. It is beneficial as it allows people to seek a job to fit their talents (frictional unemployment). Also, technological progress depends on structural unemployment, which causes outdated industries to reduce jobs.
The government attempts to develop a fiscal and monetary policy to reach the natural level of employment by lowering the unemployment percentage. However, there is a relationship between unemployment and wages, which in turn influences inflation rates. High unemployment results in lower wages as people are desperate for income. Low unemployment happens during economic prosperity; therefore, firms offer higher wages to attract the labor force.
The expenses necessary to support rising wages causes firms to raise prices on products, which results in inflation. The Phillips Curve, which analyzes the phenomenon, is theoretically used in the monetary policy to find a balance between unemployment and inflation rates. Unemployment can artificially be maintained at certain levels to avoid inflation surges, which are detrimental to a number of financial and economic sectors.
The concept of unemployment influences households, society, and the nation. Individual households impacted by unemployment suffer from lower standards of living, decreased health, and lack of opportunities for education and growth. There are significant social effects such as elevated levels of crime and lack of funding for numerous civic projects and institutions. Finally, the national economic state declines as tax revenue, trade, and federal spending rapidly decline.
Article Analysis
The article from Business Insider reports on the recent announcement by the Labor Department that the U.S. economy added 209,000 jobs in July, resulting in the unemployment rate to drop to 4.3% which is a 16-year low. More than 62,000 jobs came from the hospitality and leisure industry, particularly restaurants and merchandise stores. The growth far exceeded expectations, and it serves as evidence that the labor market is performing well.
However, wage growth remains slow, increasing by 0.3% month-on-month. The slow rate was forecasted but unexpected. The decline of unions and lowered productivity are cited as potential causes, but low-paying jobs are seeing a faster wage growth rate. There has been increased participation from both young adults and the 25-54 prime worker age. The labor-force participation percentage rose to post-recession highs indicating a continuous economic expansion (Oyedele).
The article explores the effect of unemployment statistics and its position as an indicator of the overall health of the economy. The news had a positive effect on stock market futures. Also, there was a socio-political impact as the job growth showed the success of government policy in helping the employer and business growth rates. Economists predicted that the U.S. economy would close in on the natural rate of employment within a few months.
However, the job growth rate suggests otherwise as it shows no sign of stagnation (near full employment would have started a gradual decline in month-to-month job gains). An explanation for the trend can be explained by people considered not actively looking for a job directly entering employment. Therefore, the job growth continues despite a relatively small pool of the labor supply being unemployed. Since the rate is calculated in percentages from the population at random, the unemployment rate continues to fall.
Lack of significant wage growth despite a rapidly decreasing unemployment is contradictory to the expected relationship. The Phillips Curve above indicates that there is a significant imbalance between wages and employment (Yardeni and Quintana). It is possible that the labor participation rate dropped significantly in the post-recession period dropped more than the official estimate. Now, the economic expansion has motivated for many to return to the workforce, increasing the labor supply.
The Federal Reserve has indicated that weak pace of the industry productivity growth may have stunned wage growth. Lower wages do not benefit regular workers but are extremely profitable for firms as they continue to profit from the economic boom. In addition, the Federal Reserve can conduct monetary policy and postpone raising the interest rate, once again benefiting various economic agents in finance. The interest rate hike is a method to combat inflation. However, if wage and price growth is slow, it can reserve the move until the unemployment rate drops again. Also, this impacts federal policy as the federal central bank will reduce bond holdings and stimulus efforts while Congress seeks to pass legislation to preserve the current market trends.
It is clear that unemployment has an extensive impact on the national economy on financial, social, and federal levels. However, the intricate, complex nature of economics is evident as multiple factors disrupt theorized patterns. In turn, this influences the behavior of other economic agents, including federal regulators. The knowledge of economic concepts is essential in order to critically analyze the market realities and make proper applications by finding the conventional solutions
Works Cited
Oyedele, Akin. “Jobs Report Beats Expectations, Unemployment Rate Returns to 16-Year Low.” Business Insider. 2017. Web.
Yardeni, Edward and Mali Quintana. “US Economic Briefing: Phillips Curve.” Yardnei Research Inc. 2017. Web.