1. Current U.S. Unemployment and Low Wage Rate
Thesis Statement
In the economy of the United States, the rise in wage rate is less, but unemployment is becoming high in the labor force.
Explanation in the light of Economic Concepts and Theories
Considering the article Yellen Sees Muted Inflation as Unemployment Curbs Wages from Bloomberg Businessweek, written by Jeff Kearns, The long term unemployment is constantly dominating the economy of the United States, due to which the people are facing difficulties in order to enter the job market, and this rise in unemployment is exerting downward pressure on the wages. People have to work on the lower wages due to increasing competition in the job market.
This concept can be elaborated with the help of the Economic Growth Theory, which tells that business fluctuations occur in the economy that affects the rate of growth of the economy. The business cycles occur in the economy due to the demand shocks, and the supply shocks that are associated the wages of labor and prices of products. The degree of the wage stickiness, however, decreases with the passage of the time. In the short run, the wages stuck, but they are not sticky, in the short run the wages are not flexible. Same is the case with the economy of the United States. The wages of labor have stuck, and they are not increasing because of the recession that the economy has recently faced. In the U.S., people are finding it difficult to find the highest paying jobs if they succeed in finding the one. But, the wages become flexible in the long run. So, there are chances that the economy of the United States will become better, the organizations will offer high wage in future due to improvement in the economic conditions.
Further, if the Demand and Supply Analysis is considered then this analysis also reveal a fact about the U.S. wage market it is a purely competitive market, and the individual workers cannot exert any control over this wage market, as several firms are competing in order to hire particular type of the labor. Since unemployment is constantly increasing in the U.S. economy, which is making it difficult to stabilize the economy by promoting economic growth. Since the growth of the economy is expressed in terms of GDP, so the unemployment prevailing in the U.S. economy can be explained with the help of the Okun’s Law, which is an indicative of the fact that for every 1% increase in the unemployment rate above the natural rate, the economy face negative GDP gap of 2%. It means that whenever the economy fails in the creation of jobs for people who are willing to work, the production of the goods and services declines in the economy. A similar process is occurring in the U.S. economy where people are unable to get jobs, and the production of the goods and services is declining, which is hampering the growth of the economy. Furthermore, structural unemployment and frictional unemployment are becoming prominent in the economy of the United States.
But the poor demand of the goods in the economy is also leading to the creation of the cyclical unemployment in the economy. The cyclical, Keynesian or the deficient-demand unemployment took place when there is insufficient aggregate demand in the economy in order to provide employment to everyone who is ready and want to do the work. However, the demand for the goods and services falls, fewer worker and low production if needed, the wages stick and, do not fall further for meeting the equilibrium level, and ultimately mass unemployment occurs. This is the same condition that is prevailing in the U.S. economy, where demand is less, and people are the victim of mass unemployment. The name of the cyclical unemployment is derived from the shifts occurring in the business cycles.
In a nutshell, the U.S. economy is facing poor rise in the wages and high unemployment rate, which are not allowing the economy to achieve desired economic growth. The economic growth theory is of the view that the business cycles occur due to fluctuations in the prices and wages, and according to the Demand and Supply Analysis the market of the U.S. is competitive, which is not allowing a positive rise in the wages. The Okun’s law is representative of the fact the economy is not achieving growth 1% unemployment causes 2% decline in the GDP. Because of this condition the U.S. economy has to face frictional and structural unemployment. Due to the decrease in the aggregate demand, the economy is also facing cyclical unemployment. So, in order to cope with these situations the government should intervene and should induce deficit spending in order to boost the demand and employment.
2. Decrease in Population Growth Affecting Economy
Thesis Statement
The decline in the fertility rate is increasing older population in the country, and the economy is unable to achieve the desired innovation and growth.
Explanation In the Light of Economic Concepts and Theories
In the article America's Baby Bust, written by Jonathan V Last tells that the economy of the United States is unable to achieve the expected level of the growth because of the decline in the fertility rate. The present fertility rate in America has been just 1.93, which is creating many problems for the society. The population of old people is increasing, and young population is decreasing, which is economically, socially, culturally, and politically not good for the American economy. Old people in the society are not contributing to the economic growth and innovation. So, decrease in the population of adult is putting the economy in the alarming situation with poor growth and innovation.
In America, there is a Coordination Problem, as the Command System is not working properly. The people who are enjoying a good standard of living have wanted to reproduce less so that they can maintain their standard of living, and will be able to further raise their living standard. These people are of the view that it becomes possible to give better education to children, when they are one or two in number, better facilities, food, clothes, and shelter can be provided. But, this is not the case when the family size is big, having more children, as this will create a burden on the resources, and it becomes difficult to satisfy their needs and wants, better or improved living standard cannot be achieved. But, in fact, they are not just considering their own perspective, and are ignoring the economic benefits. An increase in the population, however, provides more skills and human capital. An increase in the population paves the way to the provision of latest technology in the economy, it also helps in the generation of more demand in the economy, and ultimately more economic activity. So, coordination is required among the resource suppliers, consumers, businesses, and the planners.
In the United States, there is Invisible Hand of the market, the people are working for their own personal interest, making their life comfortable by producing less, and the government is not allowed to interfere with their decisions. As a consequence of which, there are resources available, but sufficient amount of people are not available in order to exploit these resources, and getting the best from them. The population is decreasing so the numbers of workers that are available for the job are also decreasing. This is also paving the way to the situation in which the commodity demand is lower than the commodity supply. So, consumption per person is also decreasing in the economy as fewer people are available to consume the products that are available. This is not good for the economy as a whole because this is blocking the economic activities, and is not letting the economy grow because the demand as well as the supply of goods is getting affected due to poor consumption of the goods and services.
Furthermore, the decrease in the population is also threatening to the government due to poor Technological Advance in the economy. The demographers have offered policies in this regard in order to increase the fertility rate. They have suggested the free day care, offering the maternity leave, and offering subsidies to the mothers that are not able to generate the constant increase in the fertility levels in the countries or places where they have made attempts. Furthermore, the decline in the fertility rate is also hampering the innovation process of the economy. Since, fewer skilled workers are available in the economy, and the aged population is dominating the economy, so the innovative element of the economy is in danger. Without innovation, the economy cannot survive as innovation is required in order to cope with the latest trends and fast moving society. The population density or the demographic factor promotes higher productivity and innovation because it facilitates the better use of the resources available, which is not with a lower population. Due to lower population in the U.S., the innovative aspect is becoming rare, and without innovation in the economy, progress is not possible.
In a nutshell, decline in population is not good for the economy, because lower fertility rate increases old population, and decreases the innovative aspect of the society. There is a coordination problem among the supplier of resources, consumers, planners and the businesses, as a result of which the families that are enjoying a higher standard of living prefer one or two children. There is the invisible hand of the market, people are working for their self interest, reproducing less and this is decreasing the number of available workers. The consumption per person in the American economy is also decreasing. This is also an alarming situation for the government. The demographers have offered solutions such as providing subsidies for the mothers in order to increase the fertility rate so that the growth of the economy can be ensured, so that more reproduction can be ensured, and to increase in population, more skills and human capital can be available, that help in in more innovation in the economy, and the economy can be moved forward in order to ensure progress and growth of the economy.
3. Improvement in the U.S. Economy
Thesis Statement
The economy of the United States is now making recovery and is showing positive signs of growth.
Explanation in Light of Economic concepts and Theories
In the article, Slow-Motion U.S. Recovery Searches for Second Gear, Brenda Cronin has described that the economy of the United States has passed the recessionary phase, and is now making improvements. Most of the sectors of the economy are showing positive growth signs, the stock market is also showing recovery, the effect of the tight policies of the Federal government is also disappearing. The property market as well as the housing market is also showing positive growth that is also encouraging, and helping the economy of the United States to maintain sustainable growth. All these factors are indicating healthy growth of the U.S. economy.
If The Aggregate Expenditure Model of the country is considered then it become obvious that the Consumption and the Investment Schedules of the country are showing remarkable improvement. The time is over when the country’s investment and consumption was declining, now it is a time of increase in these activities as the economy has come out of the recessionary phase. The Aggregate Demand in the economy is increasing because with the recovery in the economic conditions, the consumer wealth is increasing, the consumer confidence is building and they are spending more for buying the products and the services. This is generating economic activities in the country.
The U.S. market is showing improvement in the income of the household. Since, households are the receivers of the income from the businesses; so there is a Circular Flow, the resources flow from the households to businesses through the resource market, the product flow from the businesses to the households through the product market. There are also the monetary flows in a way that the Households receive income from the businesses through the resource market, and the businesses receive revenue from the households via the product market. The businesses are now flourishing in the economy, which is generating greater income for the household that is increasing the spending of the household. The businesses are taking loans in order to make improvement in their business. This entire situation is increasing the economic activities and ensuring the growth of the economy, because the growth of the economy depends on the lending and spending activities.
Furthermore, considering the Concept of Demand, since the economy of the United States is making improvements, so the demand of the product is also increasing in the economy. The economic activities are increasing so consumers are demanding more products and the economy is flourishing. So, the demand pattern is changing in the economy of the United Sates. Further, the economy of the United States is enjoying the added leisure as well as improved products and services. The present U.S. economy is now working on the principle of the fact that catching up is Possible. Since the economy has seen a severe recessionary period, but now it is reviving and most of the sectors have shown healthy growth symbols.
In a nutshell, the economy of the United States is making improvement with the passage of the time. The aggregate expenditure model is indicative of the fact that the consumption and investment is improving in the country. The aggregate demand is also increasing in the country. The household is also showing an upward trend, the personal income of the household is increasing and the circular flow, which represents the flow of income from the businesses to the household is ensuring the growth of the economy. The businesses are taking loans in order to make investments in the business and the economy is optimistic because it is valuing the principle that catching up is possible. However, the need of the hour is that the economy should be left alone, so that it should recover on its own. As indicated that there are several sectors that are showing improvement, so the remaining sectors should also be left, so that they themselves make the improvement, without any stimulus. This is because enough experiments are done on the economy, now it’s the time that the economy should be given the chance so that it can make up the deficiency on its own, and achieve growth and development.
4. Inflation and Unemployment
Thesis Statement
The problem of the inflation and unemployment is still not addressed properly and no permanent solution of this problem is suggested by Fed. Ignoring inflation and treating unemployment will not produce positive outcomes.
Explanation in Light of Economic Concepts and Theories
In the article “How Bernanke Pulled the Fed His Way”, Jon Hilsenrath describes that the Chairman of the Federal Reserve is making risky plans that is disturbing for the economy. He is of the view that inflation is not a threat to the economy rather the major problem is unemployment. Fed has announced to buy mortgage backed securities in order to stabilize the job market. Mr. Bernanke is just focusing on the improving the condition of the job market, but he is ignoring inflation. In order to strengthen the job market, Fed is buying bonds so that it will lower the interest rate and the value of the assets such as stocks, homes will increase.
Inflation, which is a rise in the general price level and is measured by the Consumer Price Index (CPI) in the United States, is an important issue that needs to be given consideration in order to find permanent solution. However, when the inflation occurs, each dollar of the income will buy fewer goods and services than that were available before. That is, inflation reduces the purchasing power of the money.
Furthermore, the fact that inflation is a series issue that can be described by describing the relationship between unemployment and inflation. Philips curve is used in order to describe the relationship between them. According to the Phillips curve, negative or an inverse relationship exist between inflation and unemployment. When inflation rises, unemployment fell and when inflation fall, unemployment rise. So, as it can be seen from the Phillips curve that unemployment is associated with inflation.
When inflation is controlled, unemployment can be controlled, but the case inflation is left and attempts are made for controlling the unemployment rate, fruitful results cannot be achieved. Such as as mentioned in the article the Bernanke is giving more importance to the control of unemployment, and is considering that inflation is not an issue for the society. Experimenting with unemployment while rejecting inflation will not bring any positive results. The goal should be to lower both the inflation as well as unemployment. The Phillips curve provides the historical picture of the effects of the inflation rate on the unemployment rate, so it becomes easy to analyze how and in what way inflation is exerting its influence on the unemployment rate.
The economy of the United States is facing Demand Pull inflation, which is occurring because of the increase in the demand, or an increase in the aggregate demands. The basic reasons behind the demand pull inflation are increasing in the money supply, an increase in the government purchases, and increase in the price level in the rest of the world. However, the economy of the United States that is facing high inflation as well as high unemployment a phenomenon known as Stagflation. The phenomenon of the stagflation is, however, not completely predictable. It occurs in the because of the alterations and changes in the error terms of the Phillips equation. These errors can comprise of the things such as a rise in the cost of energy, and rise in the food prices.
Furthermore, the government is buying bonds in order to decrease the interest rate, since bond prices and the interest rate are inversely related. With the decrease in the bond price, interest rate falls and with an increase in bond price, the interest rate increases. So, when the government buys bonds, their price increases and the interest rate declines. The government is doing all this in order to create the job opportunities in the market, but as a matter of fact the government is analyzing just one side while ignoring the other important side i.e., inflation. The buying of the bonds is raising the prices, leading to inflation. The process can be explained as when the government buys bonds, the money supply increases in the market and this increase in the money supply become the case of inflation, which will in turn become the cause of unemployment.
In a nutshell, the action of Bernanke is not justified in that he is considering just the unemployment and ignoring the inflation. Without the cure of inflation, the cure of unemployment is a bit difficult. Bernanke is taking the steps that are beneficial for the short term, while he is ignoring the long term impact of adopting the short term measures. These measures will prove dangerous in the long run. Such as buying of the bond will reduce the interest rate and may create job opportunities in the short run, but in the long run this will become a source of inflation. The money supply will increase constantly that will lead to the inflation and without curing inflation, unemployment cannot be controlled properly. Phillips curve describes the inverse relationship between unemployment and inflation in such a way that it also becomes obvious that ignoring inflation and treating unemployment is not the solution that the U.S. economy needs.
The economy is facing both high inflation and high unemployment, i.e., stagflation, so the need of the hour is to cure both the diseases of the society, focusing on just the unemployment will not ensure the proper growth of the society. Fed should device those plans that present permanent solution of the rising prices and increasing rates of unemployment. The U.S. economy is facing demand pull inflation majorly because of the increase in the money supply. The money supply is increasing because Fed is buying bonds and securities in order to stabilize the job market. So, the need of the hour is that both the problems i.e., unemployment and inflation should be addressed so that the economy can achieve the desired level of growth in a real sense.
