On Friday, the Bureau of Labor Statistics released its official unemployment report, which provides an analysis of the health of the job market. The numbers have been met with great enthusiasm as the national unemployment rate fell to 3.8 percent, and the number of unemployed persons declined to 6.1 million.
The Federal Reserve has taken notice of the strengthening economy and the unemployment rate’s mostly downward slope since October 2017, and it’s almost guaranteed to raise interest rates later this year.
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Considering the U.S. unemployment rate is currently 3.8 percent — and economists expect the rate to continue to drop — a zero percent unemployment rate might seem good for the economy. Everyone who wants a job has a job. However, there’s an entire economic concept devoted to why that’s neither practical nor desirable.
The thought is that with low levels of unemployment, companies will have to raise wages to attract scarce labor. And although higher wages would be great for workers, that would also result in price inflation as companies would need to increase what they charge for their products and services in order to pay higher wages.
According to economic theory, these three types of unemployment are proven to be healthy for forward innovation, mobility and economic growth:
- Structural Unemployment. This unemployment type is often due to technological change or the absence of demand for the workers that are available. Historically, we’ve seen this in the advent of the automobile. The demand for horse-drawn buggy assemblers plummeted as the demand for automobile mechanics increased.
- Frictional Unemployment. This occurs when people voluntarily move between cities, jobs and careers. If someone you know recently walked away from practicing law to pursue their dream of making it big on Broadway, that’s an example of frictional unemployment. Less of a leap but still applicable is someone who just moved to a new city for their spouse, and they’re still looking for employment.
- Cyclical Unemployment. When the economy experiences a recession — which some economists argue is a good thing — and workers are laid off, there is cyclical unemployment.
So although there are some obvious benefits to a negative unemployment rate, a positive percentage is actually a good thing for the economy.
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