Why The Unemployment Rate Should Never Go To 0%

The Labor Department's non-farm payrolls report rolled in on Friday to reveal happy tidings for the economy. The
jobless rate plummeted to a nine-year low of 4.6 percent.

The statistics sent people into a tizzy, ratcheting up expectations for a Fed rate hike as early as December. When a 0.3-percentage-point drop is met with enthusiasm, why can't an economy strive for a 0 percent unemployment rate? Is a 0 percent unemployment possible or rather feasible?

Jobless Rate Meaning

Jobless rate is the number of unemployed people expressed as a percentage of the total labor force.

The International Labor Organization
considers the following people as unemployed:
  • Ones without work.
  • Currently available for work.
  • Seeking work.

A 0% Jobless Rate Could Kick Up Inflationary Pressure

Inflation and the unemployment rate are inversely correlated. The logic is this: High wage inflation is often considered a proxy for the general inflation level.

High unemployment rate would mean demand for labor force is less relative to the supply (availability of manpower). This in turn has the potential to depress wages, as people would be willing to be hired at lower wages. Alternatively, when the jobless rate is low, there are enough (and more than enough) jobs available than the availability of labor force. In order to allure the limited labor force, employers may have to jack up wages, which in turn increases wage inflation.

Thus, there is logical evidence to substantiate the proposition jobless rate and inflation are inversely correlated.

Against this backdrop, can an economy handle a scenario that presents galloping inflation levels in the wake of the jobless rate dropping to 0 percent? If you consider the many ill effects of inflation, including the hit to exporters from their products becoming less competitive in the global markets, reduced savings and fall in real wages, it could be tough proposition altogether.

A 0% Jobless Rate Could Mean Little Technological Advancement

Economists define a type of unemployment called structural unemployment. This category of unemployment arises from the lack of demand for employees who are available, with technological advancement being the most common cause of it.

Can the present generation, so accustomed and spoiled by the advances of science of technology, sacrifice the comforts offered by these for having a 0 percent unemployment level? Since a 0 percent unemployment rate often comes at the expense of technology, it is highly impractical and undesirable.

A 0% Jobless Rate Would Mean We Are Stuck In The Rut

To understand this, it is imperative that we learn another concept called frictional unemployment, which arises due to people being in the process of moving from one job to another. If jobless rate is 0 percent, frictional unemployment can't exist, forcing us to hold onto the job we have, however undesirable it is.

As we have seen above, and as it is common with any economic concept, extremes are always undesirable and a middle-of-the-approach is often the most desirable option. At least to keep inflation in check, enjoy the fruits of technology and help a move to a more desirable employment, a small amount of jobless rate is in fact a welcome idea.

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