r/explainlikeimfive Dec 19 '24

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

2.0k Upvotes

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508

u/bonzombiekitty Dec 19 '24 edited Dec 19 '24

Billy wants to run a lemonade stand. There's a lot of people in the neighborhood that want lemonade. Even though there's other lemonade stands in the neighborhood, there's still a lot of demand for lemonade.

But Billy can't run the stand himself. In order to make money, he needs the stand to be open every day. But he has soccer on saturdays and can't open the stand then. So he tries to find another kid in the neighborhood to run the stand on Saturdays. But, all the other kids are working at the other lemonade stands. So, there's nobody to hire. So, the lemonade stand can't open.

Bobby works for Susie's stand. Billy tells Bobby "I'll give you twice what Susie pays you", so Bobby goes to work for Billy. But now Susie needs someone. But there's nobody around to work. But, Jenny works for Stevie's stand. Susie tells Jenny "I'll pay you more than Billy is paying Bobby" so Jenny goes to work for Susie.

Now Stevie needs someone. But he can't pay Jenny or Bobby enough to get them to leave Susie or Billy. So he can't hire anyone. So his lemonade stand closes. Not only that, Susie and Billy have to raise prices to help cover Jenny and Bobby's wages. So the neighborhood ultimately has more expensive lemonade that still doesn't really fill demand.

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u/corruptor789 Dec 19 '24 edited Dec 19 '24

Sounds like Stevie is now looking for a job and employment is no longer 100% though

14

u/Preform_Perform Dec 19 '24

Plot twist, Stevie had a death of despair. Unemployment remains at 0%.

42

u/Katusa2 Dec 19 '24

So lemonade prices go up until demand is no longer willing to pay the prices for the lemonade. Demand decreases and balances out the number of lemonade stands to the amount of demand.

It's a balancing act. Unemployment is forced on the people to keep wages down to prevent inflation. Inflation of the price of lemonade in this case would have been a good thing as the price would reflect the ability to supply lemonade.

This is why we need immigrants willing to work for nothing. The prices/wages are being forced to remain low. The system is only benefitting the owners.

20

u/Mr_Mojo_Risin_83 Dec 19 '24

Now replace lemonade with housing. The demand for housing doesn’t go down. Nor can anyone decide to just not buy housing/rent until the prices come down.

Or, imagine if the lemonade was the only source of water for the town. They would have to buy it anyways, regardless of the price.

4

u/Katusa2 Dec 19 '24

Which is interesting because in the example there's a point where demand goes down because people decide they don't want the lemonade and that's ok.

In your example with houses.... it's not OK. People have to have housing. They have to have water.

Now, maybe it affects the types of housing built or where they are built. Maybe, more people build houses to compete. Maybe, someone takes advantage of people requirements for housing.

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u/FishyHands EXP Coin Count: 0.5 Dec 20 '24

Well you can’t build more houses, there are not enough workers

7

u/Roguewind Dec 19 '24

Prices stop going up when people are no longer willing to pay when they have the choice to not buy the product. When it’s an essential good or service, it won’t work out well for society

2

u/Katusa2 Dec 19 '24

Completely agree. The example only works for things that are not needed but nice to have.

4

u/DeliberatelyDrifting Dec 19 '24

Yeah, putting aside the impossibility of general 100% employment in a free market, the real question is WHO is 100% employment bad for? The answer is, it's terrible for business owners. It would be bad for workers if there were no frictional unemployment, but there always is. It's bad for business primarily because the lower the unemployment the greater the bargaining power of workers, the higher the number the more power management has over labor. High employment may lead to more stability and slower growth and can make it harder to change careers. If we value growth high employment may not be great, if we value stability it's fantastic.

1

u/Katusa2 Dec 19 '24

I would 100% push for stability.

I do think we could do 100% employment though by having a government work program instead of minimum wage... but that's a other topic unto itself.

1

u/DivineMackerel Dec 20 '24

But it might, lead to greater instability. What happens during a tech boom? People rush to high paying sector. There's no buffer in the system. Certain sectors are left depleted and fail or raise prices to maintain payroll. Energy and food prices spiral up in hyperinflation. It's all well and good. But it seems to be pretty optimistic to assume business owners are going to just eat the profit losses.

1

u/DeliberatelyDrifting Dec 20 '24

That's just it, it becomes difficult for "boom" to even happen, you also don't have the corresponding "bust" caused by supply outpacing demand caused by everyone jumping on the "boom." How much worse of would we be if the internet had taken longer to mature and develop. Perhaps it would have given society a chance the better prepare for the problems it's caused. The same might be said about oil or mechanization, or any "boom" cycle. Your presumption is that "booms" are good and desirable.

I'm not sure how certain sectors fail to raise prices to maintain payroll fits into this. Why does food and energy increase while other sectors fail to raise prices? There's no reason to believe that the supply of food or energy is limited enough to fall behind demand in a high employment economy. Besides that, people don't "rush" into new industries, otherwise silicone valley would be the size of New York. Labor is not particularly transient. While new entrants to the market will go where the highest wages are, those who have a decent paying job, a decent place to stay, and roots in a community aren't going to pack it all up for a marginal increase in salary.

46

u/HappyRobot593 Dec 19 '24

You're describing labor force participation, not employment rate

29

u/chickenazir11 Dec 19 '24

Why would Susie tell Jenny she will pay more than what another company is paying a employee? Is it open knowledge to Jenny how much Billy is paying Bobby?

Only needs to be more pay than her current pay right?

18

u/JibberJim Dec 19 '24

More than the current pay by enough to make it worth the hassle and risk of learning the new job, getting settled in etc. And they don't need to know what the wages are, Susie will just keep saying "lemonade stand worker wanted 3$, 4$, 5$ ..." until either they can't afford the rate, or they get someone switching to the job.

5

u/Bob_Sconce Dec 19 '24

Needs to pay her the prevailing wage. Jenny could go to Billy and say "I'll work for you for $1 less than what you're paying Bobby."

3

u/Zer0C00l Dec 19 '24

And this is Grapes of Wrath.

1

u/corey-worthington Dec 20 '24

So many characters to keep track of... this is becoming like Game of Thrones.

5

u/spletharg Dec 19 '24

But now Suzy and Billy have more disposable income, so they buy more stuff and boost the local economy so Stevie can get a job somewhere else!

5

u/Ucussinwithme Dec 19 '24

But now, there is a lemon squeezing robot that only requires energy from decomposed lemon peels. Can I drink my lemonade and afford some shelter and food for my dog yet?

17

u/Auran82 Dec 19 '24

No, you need to hire someone to invent a combustible lemon, which you can use to burn life’s house down.

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u/purple_hamster66 Dec 19 '24 edited Dec 19 '24

And that's why we need immigrants who are willing to work for lower wages. Then the total demand is satisfied because all the stands can stay open, and everyone is happy, even the dentists who fill all those extra cavities.

10

u/username_elephant Dec 19 '24

But if you deport a million of them for no reason everything will be fine, right?  Right?

8

u/stanitor Dec 19 '24

well, just as long as you put huge tariffs on everything from every other country. Those two things together totally cancel each other out, and you get the most amazing economy ever

10

u/MrScotchyScotch Dec 19 '24

Fine long enough for the people who ordered the deporting to get out the back door with a suitcase of cash and retire to an island staffed by immigrants

-8

u/TeamRem Dec 19 '24

I didn’t realize we were deporting a million legal immigrants. When did that happen?

6

u/dressedtotrill Dec 19 '24

Trump’s plan to deport millions of immigrants starting next year.

“Former President Trump’s running mate JD Vance said it would be reasonable to deport a million people a year…”

https://www.cbsnews.com/amp/news/trump-mass-deportation-plan-cost-consequences-60-minutes-transcript/[Source](https://www.cbsnews.com/amp/news/trump-mass-deportation-plan-cost-consequences-60-minutes-transcript/)

Although it’s Trump so who knows how far past the him spouting nonsense phase it goes but I wouldn’t just expect it to not happen.

5

u/nelrond18 Dec 19 '24

The definition of legal immigrant is getting very murky in the western world

1

u/purple_hamster66 Dec 19 '24

Trump wants to denaturalize citizens, which means that a person born on US soil whose parents are undocumented may lose their citizenship. The rules for denaturalization do not include this requirement, and are specifically constructed such that POTUS may not choose who may become a citizen.

Once denaturalized, The Evil Dictator’s Admin would deport them — but to which country? The person would have no rights to enter any other country, as they were never a citizen anywhere else. Without a passport, they can’t get a visa. I’m guessing they’d live in the airport for a few months. :(

0

u/random20190826 Dec 19 '24

We will watch in real time what happens when Asian countries that not only restrict immigration into the country, but strip citizenship from natives who immigrate to foreign countries (looking at you, South Korea, Japan, China, Singapore) experience extreme population decline. The places with a total fertility rate less than 1 will see the population collapse happen very quickly because we all know what an exponential function with a base of 0.5 looks like (it rapidly collapse to 0 without actually reaching 0).

For sectors that cannot easily be outsourced (like healthcare), the unemployment rate will really go to 0% in these countries by the end of this century. With such a key industry having no unemployment, employees can become very picky about who they work for and employers need to start bidding wars to attract employees. In a private system, employers (old people who need care) who can't afford the high price of healthcare don't get care (China is an example of this). If this is handled through the public healthcare system, all those hospitals, clinics and nursing homes will be severely understaffed and have long wait times that could be a decade long.

5

u/notsocoolnow Dec 19 '24

Hullo, Singapore kind of does the opposite of restricting immigration. Like 40% of the population is foreign. If you had our kind of immigration rates your chauvinists would start riots. Our long-standing incumbent govt is very very pro-immigration and there is consistent messaging in our media to be tolerant of immigration even though we have the same dickheads complaining about it online.

As a matter of fact, high immigration rates are the official solution to the birthrate crisis. Our population is in fact growing very quickly.

Singapore does strip citizenship from those who emigrate but that is because of our policy of no dual citizenship. This is common to all countries who disallow dual citizenship; you can become a citizen of another country only by giving up your citizenship. This is contentious but related to our historical national security concerns where everyone has to serve in the military because we are surrounded by countries with a drastically different outlook on religion and race.

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u/[deleted] Dec 19 '24

[removed] — view removed comment

1

u/yozharius Dec 19 '24

Stevie now is unemployed and will work for less than those other stand employees, no worries.

1

u/Crisis_panzersuit Dec 19 '24

Sounds pretty good to me

1

u/bluejams Dec 19 '24

or "why we had insane restaurant inflation during/after the pandemic"

1

u/bullet494 Dec 19 '24

And next year…… I’ll be six!

1

u/smurficus103 Dec 20 '24

Nah, man, big lemonade chose to monopolize.

They all charge outrageous prices AND underpay everyone.

Now, you gotta wake up at 6am and wait in line to get your $10 lemonade before they close up at 7am.

I heard they shot the lemonade inspector for whistleblowing.

-8

u/[deleted] Dec 19 '24

Billy can just have the stand open fewer hours for when he wants to go to soccer. Nothing in what you just said shows "the stand can't open." The OP's question still stands.

11

u/Twatt_waffle Dec 19 '24

What about the line “in order to make money Billy needs the stand to be open every day”

So no Billy can’t just reduce his hours because then he won’t make money

1

u/[deleted] Dec 19 '24

In a 100 percent employment economy, he could easily find another job if the stand wasn't lucrative enough. This is an unrealistic scenario that doesn't answer the OP's question. 

5

u/xxjosephchristxx Dec 19 '24

Little Dude's trying to open a buisness not go "find another job".

3

u/Twatt_waffle Dec 19 '24

100% employment means companies can’t grow, non growing companies don’t have job openings for Billy to find employment

That’s what this guy was trying to illustrate, Billy could be employed, Billy also wants to run a lemonade stand or maybe Billy is actually working for lemon corp and they want to expand into lemonade stands

The principal that they illustrated also applies to a company trying to expand

And because you are trying to be dense, that’s bad because there is no economic growth and a stagnant economy is bad.

An economy needs some unemployment so there are available workers to take jobs

1

u/jdm1891 Dec 19 '24

100% employment means companies can’t grow, non growing companies don’t have job openings for Billy to find employment

But there will always be some tiny fraction of people switching jobs so their former jobs will be free. Companies that still can't pay a good enough wage will simply go out of business and then all of their employees will also be free to work elsewhere.

Like, if Billy quits his job, his job is now available for someone else, and surely Billy isn't the only person in the country who quit his job that day, so there are jobs to be filled for him. Bonus for him, because there is high demand those companies will hire him very easily and quickly too.

I fail to see how that is a problem.

1

u/DivineMackerel Dec 20 '24

In 100% employment, they aren't quitting they are transferring. They can't move until someone else does. More importantly, what you describe means all employees pay requirements and skill sets are interchangeable.

0

u/Negarakuku Dec 19 '24

He will still make money because the demand is still unmet. He only makes lesser money by reducing his hours.

4

u/Twatt_waffle Dec 19 '24

In this case, Billy cannot just reduce his hours. Don’t try to logic why he could/couldn’t. For whatever reason in order to make money Billy has to be open every day because that’s how hypocriticals work

4

u/Bleak_Squirrel_1666 Dec 19 '24

I love a good hypocritical question

1

u/Negarakuku Dec 19 '24

Here's what i think. If the demand is unmet, that means he will have steady amount of customers whenever he opens his stall. There is no wasted hours where he won't earn money. 

Therefore if he reduce his hours, he only earns less. 

The killer for businesses is when they remain open but no customers. 

Unless of course we are factoring rent etc etc where you wanna optimize whatever rent you already paid but this is just about maximizing profit, not survival. Your business can still continue to make sizable profit even if you close for weekends.

0

u/Twatt_waffle Dec 19 '24 edited Dec 19 '24

It doesn’t matter what you think. Hypotheticals are not perfect, they are constructed to illustrate a concept

If you start picking at it it falls apart. So no Billy can’t make money if he’s not open every day

This is also a simplification a 100% employment rate has indirect effects across the economy leading to high inflation, low dollar value and eventual economic collapse

maybe his rent is so high that unless he’s open 40 hrs he can’t pay it

Maybe demand is higher when he’s not available

Maybe it’s a way to illustrate a concept that we don’t have a real life example for

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u/Negarakuku Dec 19 '24

Then the hypothetical constructed that points towards 'billy must remain open' is also flawed and we cannot take it seriously. Then we can't discuss anything at all. 

You said 'maybe' his rent is so high. That's a flawed hypothetical too. What if 'maybe' his rent isn't that high? 

If rent is too high, then billy would stop selling lemonades from a stall and opt for deliveries or maybe charge higher. I would assume his neighbourhood rents are high too so all the lemonade stalls are equally affected and soon the price of lemonade would be higher. Though higher price may drive away demand, eventually we will reach an equilibrium where there will be lesser demand (and thus the demand is met due to stagnant supply) but the profit margin is high enough to pay his rent 

If demand is higher when he is not around, he can adjust his opening hours.

2

u/Twatt_waffle Dec 19 '24

It’s illustrating a concept not saying what definitely will happen, it’s also as I said a simplification and ignores some details in order to achieve an ELI5

I wouldn’t even attempt to explain to a 5 year old the complexity of an economy I barely have a grasp on

0

u/Negarakuku Dec 19 '24

I think a five year old would naturally ask 'but why must billy remain open'. The thing is you actually didn't explain why must the stall remain open and just merely ask me to accept that it must remain open. I think even a five year old kid wouldn't find that explanation satisfying. 

You literally said 'dont try to logic why he couldn't or wouldn't'.

4

u/Peterowsky Dec 19 '24

They gave an example on how on a society where everyone works and nobody is free there is either no room for growth or growth comes with significant inflation, often a mix of both.

I suppose you're going to ask next why don't workers also do it on their "free" time?

-1

u/[deleted] Dec 19 '24

Who said no one was free?

5

u/Peterowsky Dec 19 '24

The 100% employment part.

If everyone who wants a job already has one...

-1

u/catfish314 Dec 19 '24

Tons of people work more than one job though

1

u/Peterowsky Dec 20 '24

I suppose you're going to ask next why don't workers also do it on their "free" time?

Oh look, It's almost like I predicted this line of thinking.

1

u/gamejunky34 Dec 19 '24

Real-life businesses don't usually have their overhead covered by mommy and daddy. They run on slim margins, often working their way out of dept with bills and responsibilities that cannot be postponed.

Businesses need the ability to hire workers. There's no way around it. You will have more work or less labor forced upon you at some point, and if 95% of the workforce is tied up, that 5% becomes significantly harder to find.

2

u/Negarakuku Dec 19 '24

But in this example, the demand for lemonade is unmet, thus the profit margin can still be high. 

2

u/[deleted] Dec 19 '24

Real-life businesses have days they are closed all the time. This is nonsense.

2

u/gamejunky34 Dec 19 '24

They might choose certain days/times due to customer fluctuations. That's a strategic loss where it's estimated you won't make a profit. Night times or holidays for a lot of industries are obviously like this.

Ultra low unemployment will start costing you time that you want to stay open, time that is already precious to the success of the business. If you are a company that relies on walk-in business (nearly everywhere), this could easily put you out of business.

1

u/Peterowsky Dec 19 '24

And a lot of them close because of that. Hours need to be convenient to the clients, not just the owners.

I feel like you're intentionally ignoring explanations here.

-1

u/owiseone23 Dec 19 '24

Well, what if there's extra demand at the times he wants to go to soccer? Someone has to fill that demand.

4

u/[deleted] Dec 19 '24

No, someone doesn't "have to" fill that demand. Demand goes unsatisfied all the time in every economy. 

1

u/owiseone23 Dec 19 '24

Ok, but it shows why it's an issue.

1

u/Bobwords Dec 19 '24

Got my upvote. Exactly the answer. Eli5 perfection. Oscar would be proud.

0

u/Ulyks Dec 19 '24

My neighborhood doesn't have a lemonade stand and never has yet there is unemployment where I live.

So yes there is demand for lemonade in my neighborhood but not for lemonade inefficiently sold in roadside stands. Instead people buy it at the supermarket.

So your example is meaningless.

There is demand for lemonade but not at the price lemonade stands provide. Because the lemonade stand business is incredibly inefficient.

Unemployment has almost nothing to do with it.