Date: 2014-10-09
Optimal unemployment rate and Democrats
High unemployment is a natural phenomenon. Contemporary labor markets, especially those of developed countries, have their optimal employment rate at a relatively low range of the historical norm or lower. This is fueled by various forms of technological advancements that enable automation and globalization.
To understand what this really means, one should first consider the concept of over-employment and its negative implications. Here, systems with an over-employment issue are those where the actual employment rate exceeds the theoretically optimal employment rate. Even though over-employment contributes to political stability and looks great in numbers (even the overall productivity would misleadingly improve, because statistics capture corporate activities better than they do entrepreneurial or home activities), it has its own problems. Let us first examine the cause of it.
Over-employment is caused by labor shortage. In an over-employment environment, the available workforce or talent pool is too small to fulfil demand by employers. Employers then have no choice but to hire under-qualified employees for the job, and the quality of goods and services falls.
A good example of this I can think of is the current dental implant market, which requires skilled implant practitioners. To begin with, such specialised practitioners are rare. Further, the demand for implant services are becoming increasingly widespread, particularly as the populations in developed countries begin to age rapidly. Thus, in at attempt to meet this burgeoning demand, many mediocre or under-qualified employees (dentists) end up operating, creating a norm of poor service in this field. Another, more extreme example of over-employment is the Communists' full employment policy that completely disregards efficiency. You've probably heard stories of Chinese construction workers during the Mao era: one group would be instructed to dig holes, and those in the next shift would be instructed to fill in the holes with dirt. Full employment, achieved.
Sarcasm aside, consumers essentially become losers with over-employment. Here, we should also note that many consumers are employees, and all employees are consumers. So, in a sense, for those who 'should not have been employed if the system had the optimal employment rate,' this becomes a matter of whether they prefer to be employed themselves and have a slightly lower economic surplus (because you should expect the sum of: (1) producer surplus passed on to someone else (probably not even your family members, given the skewed social structure) who deserves to be employed at the labor market's optimal equilibrium and (2) consumer surplus on the household to be largest at the optimum), or they would rather choose to let the income be channeled to someone who can really excel in promoting systemic efficiency.
This could seem complex, because people work not only for money. Jobs provide many other intangible surpluses and deficits such as self-esteem, purpose, sense-of-belonging, and stress. Yet, I would guess that almost everybody would choose the former, i.e. to be employed. This is especially true because it is unlikely that the high earners' income will be redistributed fairly, not to mention the varied perceptions of fairness.
US Democrats stand a better chance of helping the system by their focus on wealth redistribution that should help the unemployed, especially those who are unemployed not because of their incapability but because of structural challenges. When the unemployed are fed and cared for, it will have a positive impact on the system, as very few of the unemployed ones' struggle have a potential of raising the chance of disruptive innovation: the US's strongest suit. The chance of this increases with time, because the proportion of unemployment that is due to the labor market's structural issue, not the labor's quality, naturally goes up.
Democrats would keep pushing for lowering the unemployment rate. As this is hard to achieve, this could appear to be a cause for concern. But that's ok. They may be able to create an illusion by playing with the labor participation rate, and that's also ok, because market sentiment is as important as the fundamentals, and so it is important to manage expectations even in that way. Social instability would be much worse if the system lacked support mechanisms for the redistribution of wealth via a more progressive taxation and a better healthcare coverage. Note that the term is 'redistribution' of wealth, not 'distribution,' (The money must go into the high earners' pocket first.) that will make peace in this society, because only the former is possible between the two, as the technological advancement is a virtue that must and will surely be promoted.