Tuesday, April 11, 2017

The 0% Unemployment Rate

Why is 4.5 % the lowest sustainable unemployment rate? According to Federal Reserve Chair Janet Yellen the rate is slightly below what is considered to be possible long-term and he Fed has decided to try and ease their balance sheets and try and create a neutral stance on the economy this year. What does this rate mean and why is it so important to economic decisions?

From an economic standpoint 5% is seen as the lowest sustainable unemployment rates based on natural economic equilibrium. Unionization and forced employment policy can raise this rate but there are unwanted effects on society that include inflation and an inflexible market with little cushion. An inflexible market at a 0% unemployment means there are few opportunities. 

Different economists will put this number at different places based on how the economy is currently acting. They do agree that there must be a number above 0%.....duh! As employment levels decrease to say 1 or 2% there will be a corresponding increase in the cost of goods and items as inflation speeds up. More money in the market leads to increases in prices as demand outstrips supply.

An unemployment rate of 4.5 % allows for enough freedom for workers to move to other jobs, seasonal employment to pick up for the holidays, and a level of demand for employees so wages can rise. The movement of people and jobs will allow for a cushion in unemployment where there are opportunities for employment exchanges of new, old, and transitioning employees. A 0% unemployment rate means there won't be significant increases in economic output or market cushion for economic cycles.

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