I was recently in a Political Science class discussing various forms of governments. Some how the topic of unemployment came up and the teacher asked if anyone had taken economics and what percentage of unemployment is ideal for a economy. Having never taken any formal econ classes, aside from reading Mises.org and books by Mises and others, I did not raise my hand but asked my self what the Austrians would have said. I thought zero unemployment would be ideal (as everyone would have a job, thus having income, and be producing products for which there is demand). I was disappointed when I heard one student raise his hand and say “4%.” The teacher said, “Yes, 4% and do you know why?” Another student said, “In order to keep inflation down.” “Yes,” said the teacher.
This just blew my mind.
Maybe I have yet to study Austrian economics enough, but I don’t think they would agree. Can anyone please explain why people think 4% unemployment is good for keeping inflation low and what the Austrians have to say about this? If any of the notables discussed this, please let me know where I can read about it.
It seems more appropriate that you ask them how unemployment could possible keep inflation down.
If there are more people productive, then more things are produced, and goods being expressed in money will lower in prices as compared to less things being produced.
That is, if we take the definition of inflation to be the prices of things instead of the production of money.
lol why not 3.9% ? or 4.2% ? Its such nonsense to just come up with arbitrary numbers (I suppose based on historical data) and call it an economic fact
Obviously, there is no way to know what an optimal unemployment rate would be. It is whatever the market determines it to be at any given time. Why the student and professor said that it is optimal because it reduces inflation is beyond me. However, I do think there is some stock in saying that a 4% unemployment rate is close to optimal. It means that the economy is using its human capital pretty close to full efficiency. It has been observed that as it gets above 4%, employers start lowering wages to get people to come work for them. As employment falls below 4%, employers start raising wages to get the better talent. 4% is thought to be enough elasticity in the market for it to work the most efficiently. Also, if I remember correctly, I think the academics have decided to change it to 6% is optimal. But maybe they changed back to 4% again.
Of course, “unemployment” is so subjective. The government says it is just people looking for work. But who is not looking for a better job? And they do not count stay at home moms either. And the government counts people that are “looking for work” but are actually just enjoying their unemployment insurance. To be “looking for work” means you are filling out applications, whether or not you actually go to interviews.
There is no relation between employment percentages, especially the government given ones, and inflation. Laborers and employers can not create or destroy inflation. Laborers and employers raise and lower their wage demands according to the supply and demand conditions they find themselves that are caused by previous inflation. The inflation is a product of creating money.
Furthermore, there is no optimal amount of unemployment, or an optimal amount of anything in an economy. The number of humans engaged in getting wages is not a measure of efficiency. Laborers like the suppliers of any other goods must satisfy the desires of consumers of labor commonly called employers. Laborers that fail to satisfy their consumers will be idle.
What inflation does do is give false signals about the future condition of the market place to entrepreneurs. The entrepreneurs become consumers of labor as they try to satisfy the desires of their customers. The entrepreneurs then engage in unprofitable inflation based business activities and eventually must reduce their consumption of labor causing labor resources to be idle. The unemployment is from the time gap when these idle resources hunt for other consumers of their labor.
Yeah, 4% is the “natural rate,” you know, the average rate of unemployment caused by the government’s support of wage rigidity. Unemployment is not a mandatory economic condition; if markets are allowed to clear it can hit zero, or remain somewhere near zero. Inflation and unemployment are not correlated, at least in the long run. It’s true that inflation may allow unprofitable firms to exist, temporarily, but will eventually be destroyed by the inevitable correction, and create massive unemployment. These firms depend on perpetual inflation, and a constant suppression of this interest rate. Inflation is exogenously determined, meaning, it’s created by governments, not by employment.
The reason it is not “0” is because in order to grow an economy there has to be an unemployed labor pool…
This is the mentality…
Assigning a number is stupid, but that is the reasoning…
If there is no unemployment and new businsesses start or current ones expand production, there must be labor capital available…
Here is the train of thought…
0% unemployment…
Labor is demanded, so the value of labor increases since there is a limit on the supply and it is now a matter of getting the labor over other firms that already have the labor employed, this leads to an overal increase in the price of labor. Productivity goes down for other firms to produce for the demanding firm, the cost of products rise with the increase in the price of labor (this is the inflation they are most likely speaking of)…
I think we’re all pretty confused about it. Maybe someone with solid economic knowledge should come and help. I don’t think there is such thing as “necessary unemployment”. This is just what the market sets. The reason why keynesianism wants credit expansion is because they consider that wages are sticky, and a fall of consumption will create unemployment, which in turn makes consumption to decrease further (downward spiralling). We, as libertarians, should oppose unemployment that is not voluntary and/or transitional.
inflation is no remedy for the problem of sticky wages—that is, for the problem of coercive labor unions. Wages are sticky only to the extent that the workers choose not to work. But the crucial question is, how long can they afford not to work? And the answer to this question is that this period is constrained within the very narrow limits of their savings. As soon as a worker’s personal savings are exhausted, he willy-nilly starts offering his services even at lower wage rates. It follows that in a free labor market, wages are sufficiently flexible at any point of time. Stickiness comes into play only as a result of government intervention, in particular in the form of (a) tax-financed unemployment relief and of (b) legislation giving the labor unions a monopoly of the labor supply.
