Three Percent Unemployment vs Supply and Demand

Abstract:

Three to five percent unemployment rates appear to be normal; until one considers the global economic incentives surrounding it. Then it appears to be targeted. Selling products abroad includes having competitive price points. Since many countries have similar industries, that compete with each other on the global stage, price points are expected to be a part of it. This is an observation made in Classical Economics; that is pertinent when considering unemployment rates. Targeting the balance of zero percent unemployment has a supply and demand effect of stabilizing wage earnings; which keeps pricing fair as well, however keeping it slightly out of balance, promotes competitive price points in the global economy. Because payroll is a part of overhead that affects pricing, it has an effect on the breadth of the job market.

Classical Economic Insight:

Adam Smith was known to suggest allowing countries that are proficient in certain markets to handle those specific markets. Though competition in markets can have favorable effects it’s not always the case.

For instance, competition in ratings companies incentivized fraud during the housing bubble. Where one ratings agent would not give fraudulently high ratings, another would. Since the ratings agents are public companies, they are compelled to continue increases in profit margins. They were selling ratings; in the interest of stockholder value.

It’s observed that when one agent adopts a strategy to gain an advantage, whether or not it is economical or even legal, others might adopt the same strategy to compete. Sovereign countries should be considered agents; in the context of global economics. Countries appear to be targeting 3% unemployment rates; to slightly flatten wages.

Supply and Demand:

Balance of business and employment should drive unemployment to hover around zero percent. Domestic interest insists that more businesses equates to more economic activity and even a higher GDP. Where three to five percent of the population is unemployed, human resources are wasted, public assistance is leveraged and wage earnings have no gains with supply and demand. If unemployment were to hover around zero percent, there would be balance between employers’ and employees’ markets; which would be expected to stabilize wage earnings. Unemployment thus has the negative effects of poverty, waste of internal revenue, increases in cost of living and lower economic activity, resulting in a lower GDP.

Crisis Theory:

Crises occur when economies are severely out of balance. Any aspect of accounting that does not target a balanced equilibrium will demonstrate itself to be a risk factor. The lack of balance in unemployment rates is no different. That lack of balance is lack of balance of economic activity. It decreases buying power; thus affecting profit margins, in a degenerative manner. Because employees are also consumers, businesses rely on employees to keep them in business with purchases.

Closing:

The global economic incentives with respect to price points have a number of unfavorable influences on nations economies; that are expressed through unemployment rates. It seems likely that not targeting zero percent unemployment rates puts all nations at an economic disadvantage; as the frequency of crises increases. There does not even seem to be a short term advantage to three to five percent unemployment. The domestic risks appear to be too high; and they scale to global risks, by exacerbating global poverty and diminishing returns to fight it. This is also a global inefficiency that distracts from other serious global concerns.