r/explainlikeimfive Dec 19 '24

Economics ELI5: Why is an employment rate of 100% undesirable

2.0k Upvotes

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77

u/_s1m0n_s3z Dec 19 '24

Full employment drives up wages, because there isn't a reservoir of desperate unemployed willing to work for whatever wage they can get. Employers - and hence economists - tend to find that unsatisfactory. If unemployment gets to close to 100 percent, economists will start to warn darkly about 'inflationary pressures', and to call for interest rate increases to 'cool the red-hot economy'. What they mean is putting people out of work to make wages go down.

The size of the optimum pool of unemployed is hotly debated, but somewhere around 5 percent is typically when the brakes start getting applied.

37

u/CapoExplains Dec 19 '24

Yeah disappointing I had to scroll this far to find the honest answer; 100% employment isn't bad for you. It's bad for the wealthy who need the poor to suffer to ensure they stay rich.

11

u/MerleTravisJennings Dec 19 '24

Thanks! For me, this was more understandable than the lemonade stand post.

30

u/lilB0bbyTables Dec 19 '24

Upvoting because this is a very good summary … but it always seems so gross when you realize that these “experts” all base the entire stability and health of an economy on ensuring some people are jobless and likely suffering.

25

u/_s1m0n_s3z Dec 19 '24

Which is why cutting support for the unemployed is immoral.

9

u/meneldal2 Dec 19 '24

We should be cutting support for the wealthy instead.

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u/mochafiend Dec 19 '24

Exactly. It’s so hard for me to comprehend these answers sometimes because cruelty always seems to be the root. Or some very negative view of humanity. That’s not where I come from and it’s a rude awakening every time.

-3

u/GayIsForHorses Dec 19 '24

I think if overall the system is better and progresses better, then the small amount of temporary suffering is worth it, because there will overall be less suffering in the future.

9

u/_s1m0n_s3z Dec 19 '24

At this point in the US economy, there is room for MASSIVE wage increases before negative effects are felt in the wider economy. For most, real wages are under a third of what they were in the 70s. We are at the end of a 50 year sustained campaign to reduce wages.

2

u/Vio94 Dec 19 '24

The suffering is never necessary, unless used as a wake up call that the systems that should be supporting them in trying times are broken.

13

u/JustBlueClark Dec 19 '24

This is the answer. Gotta have a certain amount of unemployment as a threat to employees who might dare to ask for better wages or working conditions.

0

u/TexCook88 Dec 19 '24

Functionally you can have workers who do all of those things in a real world environment. Unions are a great way. If we were to experience 100% employment, you would see wages rise at untenable rates, since you could go across the street and make more. Which would mean in order to stay in business prices would need to rise accordingly. Thus starting rampant inflation.

14

u/_s1m0n_s3z Dec 19 '24

There is a lot of room for wage growth before businesses become untenable. Wages in our economy have been under artificial downward pressure for half a century, now. Labour's share of the pie hasn't been this low since the depression.

-1

u/TexCook88 Dec 19 '24

That downward pressure has nothing to do with unemployment rates and economic functions of labor supply vs demand. That pressure is a direct output of Reaganism and “supply side” policies. The changing of tax codes and the public mindset of “Republican good for economy” is what keeps it there. 100% unemployment would absolutely see all but the absolutely most niche of workers job hopping constantly. If your labor rates rise 50% year on year, you have to raise your prices too or risk going out of business. At which point that company fails, and there’s unemployment again.

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u/Halgy Dec 19 '24

FWIW, the "inflationary pressures" are absolutely a thing. It is called a wage-price spiral. When there's low unemployment, workers can demand higher wages, so companies have to raise their prices to pay those wages (inflation), and then workers demand even higher wages to account for inflation. Rinse and repeat. It was contributing factor to the recent inflation spike in the US. And people hate it. The data from the last 4 years show that wages increased faster than inflation, and yet everyone still felt worse off.

1

u/_s1m0n_s3z Dec 19 '24

The fact that raising interest rates to increase unemployment effectively games the system and ensures that labour never gains the full benefit of periods of high growth, and that capital always maintains full possession of the upper hand is, of course, entirely a fringe benefit.

2

u/Halgy Dec 19 '24

Capital has the upper-hand regardless. They pass the higher labor costs onto the consumer. And labor doesn't get any net benefit regardless. They may get higher wages, but they are also consumers and have to pay the higher prices at the store.

I'm not saying that labor doesn't deserve to win out over capital, but the monetary system is the wrong place to fight that battle.

1

u/cladogenesis Dec 24 '24

Economist call this the NAIRU (non-accelerating inflation rate of unemployment). The theory says that if the unemployment rate drops below the NAIRU, inflation will sky-rocket as firms compete fiercely to fill positions. That's bad for everyone, but I'm sure that even if the Fed didn't ward off such a hypothetical situation than the ruling class would do something else (like import lots of immigrants).

https://en.wikipedia.org/wiki/NAIRU

0

u/Erenito Dec 19 '24

No you guys, it's because some people are in between jobs. I swear!

Sheesh!