Unemployment and wages
Our economic and financial infrastructure has grown and improved with time, but the business cycles remains a constant factor. There are still collapses in the market and conditions do improve on planned stimulus by Government and market sentiment. This cycle of booms, moderate growth and inflation combine to make a Business cycle that leads to growth in labor market during expansionary phases, and lead to high unemployment rates in recessionary phases. This theory can be observed in the recent labor statistics of USA. The recession that started in 2007 and continued till 2009 was a trough of the business cycle and the recent data since looks like recovery if employment is considered as an indicator.
Image source: Market Realist [1]
If this figure is indicative, the words of Barclays chief United States economist, Michael Gapen; “We don’t think the economy is sliding into recession” might as well be set in stone then just speculation. American companies, especially the manufacturing sector, seem to have translated this optimism into job creation (more than 1,50,000 jobs were created in last month).
Chief reasons why the unemployment rate has steadily decreased in the last few months include, positive outlook about the future, robust global demand, successive rounds of quantitative easing by FED (Round q1 and q2 were not as successful as the positive sentiment that the last round q3 created in the market) and more recently plummeting oil prices. As all of these factors came together, the unemployment rate dipped to 4.9% (natural rate of unemployment is 5.5%) and thus demand and supply dynamics of labor market changed. Currently, requirement of labor is high and availability is not (due to low unemployment rate, specific skill set of labor has already been absorbed into the workforce), thus the law of demand dictates a high price of labor as supply dips. Also the theory of favourable supply shock can explain opportunity for profit and expansion, thus employment. A favorable supply shock is a sudden increase in supply that shifts the short-run aggregate supply curve (SRAS) to the right and thus leads to lower prices and an increase in real GDP.
Favorable supply shocks result in:
Lower costs
Lower prices
Higher real output or real GDP
Lower unemployment
All the above results have been reflected in the US. Due to less cost of oil (Elliott, L), cost of manufacturing went down and thus more quantity of products was produced with the same resources.
This good news is not unqualified. The wage rate might be increasing, but it is happening at a decreasing pace in Jan/Feb 2016 as compared to last quarter of 2015. This may be a sign of slow growth to come. But this rate of hourly wage growth is a rare sign of stability in the face of pessimistic market outlook and China uncertainty. A part of success can be attributed to Obama administration, with 8 years of hard work to get the economy out of recession.
This wage rate hike may be a boon to working class, but employers have voiced concerns about the wage rate eating into corporate profits. If that is true and salary budgets continue to grow under labor supply glut, new jobs creation rate could dampen in the coming year as a correction. According to PwC, this concern is widespread. Also the decrease in unemployment does not necessarily mean that the economy is on its way to a modern utopia. Structural unemployment will still exist. Structural unemployment can be defined as a longer-lasting form of unemployment caused by fundamental shifts in an economy. Structural unemployment occurs due to a number of reasons – workers may lack the requisite job skills, or may live far from regions where jobs are available but are unable to relocate there. Or they may simply be unwilling to work because existing wage levels are too low or at least below the rate that will encourage them to offer their effort. So while jobs are available, there is a serious mismatch between what companies need and what workers can offer. Structural unemployment is made worse by extraneous factors such as technology, competition and government policy[3].
The recent scaling down of oil mining, and refining operations has led to loss of jobs. The same people may not possess skills required to get employed elsewhere (skills in niche industries are not always transferable) and though there might be vacancies in companies, exact skill matching might lead to structural unemployment.
In conclusion, it can be said that current labor statistics in US are strong and outlook is positive for the coming year. There are concerns as to the continuity of this trend but the adjustment back to the natural rate of unemployment might still take a while and in the meantime, the uptrend in wage increase (even if it's at a sluggish rate) is possible.
Works cited:
The Broad Market Is Tending above the GDP Curve: A Positive Sign. Market Realist. Web. 23 Feb. 2016.
Elliott, Larry. "Oil Price Falls to 11-year Low with Global Glut Expected to Deepen in 2016." The Guardian. Guardian News and Media, 2015. Web. 23 Feb. 2016.
"Structural Unemployment Definition | Investopedia." Investopedia. 2003. Web. 23 Feb. 2016.
