The current unemployment rate is in the US in currently under 4%, which is close
ID: 1136557 • Letter: T
Question
The current unemployment rate is in the US in currently under 4%, which is close to a historically low for theUS economy. What does this suggest about cyclical unemployment in the US economy?Explain why it might be unwise for the US government to try to push the unemployment rate lower than 4%?
Why might businesses not want the government to try to further decrease the unemployment rate? Use the term “reserve army of unemployment” in your answer.
The current unemployment rate is in the US in currently under 4%, which is close to a historically low for theUS economy. What does this suggest about cyclical unemployment in the US economy?
Explain why it might be unwise for the US government to try to push the unemployment rate lower than 4%?
Why might businesses not want the government to try to further decrease the unemployment rate? Use the term “reserve army of unemployment” in your answer.
Explain why it might be unwise for the US government to try to push the unemployment rate lower than 4%?
Why might businesses not want the government to try to further decrease the unemployment rate? Use the term “reserve army of unemployment” in your answer.
Explanation / Answer
As per the latest report, the unemployment rate in U S is 3.9% in August 2018. This is not cyclical unemployment. The cyclical unemployment results from the business cycle. During recession unemployment rises but in boom the unemployment decreases. The present unemployment in U S cannot be attributed to the business cycle. It is actually due to economic, social and political factors. The unemployment cause by such factors is termed as natural rate of unemployment. The labours may remain unemployed when they quit the present job and looking for a new jobs. This type of unemployment is known as frictional unemployment and is a part of natural unemployment. The unemployment may cause by the technological advancement. People may remain unemployed for a very short period as they lack skill as per the advancement in technology. Again the inherent structural change in the economy also causes unemployment. For example a move from agriculture to industrialization leaves the peasants unemployed. This is also a part of the natural rate of unemployment.
It is unwise for the U S government to reduce the rate of unemployment below 4%. This is because if the unemployment rate falls below the natural level, the economy has to face inflation. There is an inverse relation between unemployment and inflation. As unemployment increases in an economy, the inflation decrease and viceversa. This phenomenon has been well defined by A. W Phillips in 1958 his article “ The relationship between unemployment and the rate of change of money wage in the United Kingdom.”. When the government of a country try to expand aggregate demand through expansionary fiscal and monetary policy, this money will go to the productive channels. Since the economy is near to full employment the economy will be unable to increase the production. This excess money will be spent on goods and services which have already been produced. This creates inflation in the economy. If unemployment persists, the production will increase along with increase in demand. Unless the supply cannot be increased in proportion to the increased demand there will be inflationary pressure in the economy.
Thus the tradeoff between unemployment and inflation in Phillips Curve shows that if U S economy goes to reduce the natural rate of unemployment below the present 4% the economy will suffer inflation. It sheer unwise for the U S economy to reduce unemployment below the natural rate of 4%.
The reserve army of unemployed in a concept developed by Karl Max in his Das capital. According to Marx the capitalism is characterized by the existence of Reserve Army of unemployed. The existence of this reserve army results in weak bargaining powers to labours and compels them to stay at subsistence level of income. The workers cannot demand higher wage because there are other people who are willing to accept the wage at the prevailing wage. The reserve army of unemployment is caused by the two factors namely the increase population and the technological improvement. During the course of the capitalist development the population inevitably increases. The increase in population contributes to the weak bargaining power of workers and their low wage at minimum subsistence. The second contributing factor is technological improvement. With the technological improvements the capitalist try to use the labour saving devices. This would throw out the people from job.
The businesses in U S not in favour of the government to reduce unemployment further. This is because the profit of the business man depends upon the cost of production. The reduction of unemployment rate by the government will increase the cost of production. This is because at low unemployment rate the bargaining power of the labours improves which compel the business unit to offer higher wages. This will badly affect their profitability. Thus the existence of Reserve Army of Unemployed is good for the business for all the time.
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