Unemployment Rate, Natural Rate of Unemployment - Essay Example

Macro 3 College: Unemployment rate Unemployment rate corrects for the usual increase in the number of unemployed people asa result of increases in population as well as the work force relative to the total population (Levin, 2010, p.7). It is normally expressed as a percentage, hence calculated as indicated below: Unemployment rate = (unemployed works/total labor force) x 100 Total labor force = employed + unemployed 1. Number of people employed = 108,500,000 Number of people unemployed = 8,400,000 Therefore, total labor force = 108,500,000 + 8,400,000 = 116,900,000 Hence, official employment rate = (8,400,000/116,900,000) x 100 = 7.19% 2. Official number of unemployed = unemployed people + discouraged workers Number of people employed = 108,500,000 Number of people unemployed = 8,400,000 Number of discouraged workers = 1,200,000 Therefore, official number of unemployed = 8,400,000 + 1,200,000 = 9,600,000 Total labor force = 108,500,000+8,400,000 = 116,900,000 Hence, unemployment rate = (9,600,000/116,900,000) x 100 = 8.21% The unemployment rate in problem two is higher than that of problem one simply because the official number of people unemployed is higher in number two than in one. Unemployment rate is a ratio between unemployed and the total labor force. So when the Bureau of Labor Statistics considered discouraged workers as unemployed, the ratio becomes higher. In addition, the discrepancy presents the dynamics of the employment environment where the labor force remains constants. In such a case, any increase in the number of unemployed will automatically lead to higher rate of unemployment. However, if the total labor force is changing due to immigration or other trends, increase in unemployment may not necessarily lead to a higher rate of unemployment. Natural rate of unemployment The natural rate of unemployment refers to the rate of unemployment in which real wages find their long-run level such that it is consistent with aggregate production. This should occur in the absence of different temporary frictions in the labor and goods market such as partial price adjustments. There is a balance between the aggregate supply and demand for labor. Natural rate of unemployment typically occurs in all economies including healthy economies. The reason is that workers keep on flowing in and out of the labor market as they look for better jobs, and will often be employed when they find the jobs (Gwartney et al., 2008, p.181). Hence, it is hard for an economy to have no rate of unemployment even when severely overheated because wages would rise prior to achieving the actual zero employment rate. At the natural rate of unemployment, those people wishing to work for the existing wage rate have already secured employment and hence the presumption that the labor market has no involuntary unemployment. What remains in the market is only some voluntary employment since some workers remain out of employment because they are searching for jobs with higher wages and better working conditions. Therefore, some economists dismiss the validity of natural rate of unemployment during the labor market equilibrium when the rate of unemployment is consistent with real wages and price inflation. Those supporting the concept believe that the market has the power to clear at a stable price and that the labor market is just like any other market in the economy. The natural rate of unemployment will exist in a healthy economy due to several reasons. The first reason is due to frictional unemployment which occurs as people leave jobs when moving to other areas without arranging for another job. It may also occur when people decide to leave jobs for personal reasons. When these people decide to return to the labor force, they are considered as unemployed simply because the have no job as per that time. The second reason stems from structural unemployment that lead to specific preferences for particular jobs in a particular market. The fact that economic needs as well as worker skills are changing means that there will always be an imbalance between job availability and job skills. For example, advances in technology will always force some workers to be relocated to cheaper positions. Finally, surplus unemployment can lead to natural rate of unemployment in a healthy economy. This results from minimum wage regulations and unions. If the wage levels are set higher, unemployment will always occur. This is because employers will retrench some workers to increase the salaries of the remaining employees as required while maintaining the same payroll budget. Good and bad Inflation In most cases, economists consider inflation in terms of inflation-indexed contracts which are the more common types of inflation impacts. Another impact though less common is the strict inflation targeting and prevails in some economic systems. Economists attempt to encourage the two types of impacts due to their positions towards inflation and the simplistic perceptions of nominal contracts. Today, their views on inflation are similar to the attitudes of doctors towards cholesterol some years back when they thought all cholesterol as bad. As doctors then tried to reduce the levels of cholesterol in their patients to what they thought as safe level, economists today suggest that we should endeavor for a positive inflation of about one or two percent. They think that any inflation rate higher than that targeted is bad despite the source. Economists consider good inflation in Pareto sense to occur in aggregate-supply-caused inflation when aggregate demand fails to change in tandem with nominal contracts. Imagining of a situation where a closed economy has one consumption product and people consume that entire product as it cannot be stored, and firms producing the product are associated with aggregate amounts of labor demanded, then we can understand good inflation. The firms will certainly maximize profits in conditions of real land rate and wage rate. If productivity is elevated than expected these conditions should be higher. If the conditions are set before the realization of productivity, contracts ideal for efficient consumption allocation will be dynamic and change the conditions according to productivity. It is good inflation that makes these ideal contracts to be dynamic in response to the nominal aggregate demand that remains constant. When productivity increases, aggregate supply rise, causing the price levels to reduce. These decreased price levels cause the real land rent and wage to rise just as required for profit maximization. When productivity decreases, aggregate supply lowers, causing the price levels to rise. The increased price levels cause real land rent and wage rate to reduce so that profit maximization can hold. Aggregate-supply-caused inflation is also considered as good by economist through the lens of the consumer. When nominal aggregate demand fails to change, inflation together with contracts facilitate consumer planning for their consumption allocation for it to be proportional to the aggregate supply. Nominal contracts will adjust consumers’ real payment to the adjustments in aggregate supply. Inflation is especially good, playing an essential role in allocating the impacts of adjustments in aggregate supply. When Pareto-efficiency necessitates people to share proportionally those changes, ideal contracts are efficient until nominal aggregate change. Economists consider bad inflation to occur in aggregate-demand-caused inflation. If nominal aggregate demand does not change, nominal contracts facilitate the allocation of alterations in aggregate supply. Unfortunately, stochastic elements to nominal aggregate demand cause supposed contracts to be inefficient in the allocation. Note that the theorem of consumer-aggregate-supply functionality suggests that consumers when strictly risk indisposed and the entire consumption product is consumed, any consumption allocation deemed to be efficient must be dependent on aggregate demand. Therefore until aggregate demand changes in varying states of nature, the particular consumption allocation must also be identical in those states. But, unanticipated alterations in nominal aggregate demand cause adjustments to the Pareto-efficient consumption allocation despite the constancy in aggregate supply. Hence, the resulting alterations in consumption allocations mean a departure from Pareto-efficiency. In most nominal contracts, it is the obligation of one party to make monetary payments to another party. Therefore, when unanticipated rise in nominal aggregate demand leads to inflation greater than expected, the actual payment will apparently be less than expected. This will advantage the party paying but harm the one receiving the money. Alternatively, when unanticipated reduction in aggregate demand leads to inflation less than expected, the actual payment will be higher than expected. This will harm the party paying and advantage the one receiving the money. Assuming both parties are risk indisposed, they will be a priority worse-off considering the chances of unexpected inflation caused by nominal aggregate demand. They would rather not be exposed to that kind of risk. References Gwartney, J. D., Stroup, R. L, Sobel, R. S. & MacPherson, D. 2008. Economics: Private and Public Choice. Florence: Cengage Learning Levin, L. 2010. Unemployment and Economic Recovery. Darby, PA: DIANE Publishing. Segura, J. & Braun, C. R. 2004. An eponymous dictionary of economics: a guide to laws and theorems named after economists. London, UK: Edward Elgar Publishing. Read More