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Full Employment: Why Does it Matter?

by Matias Vernengo

In my intermediate macroeconomic classes at the University of Utah I always start by asking students which they think would be a more socially relevant problem: an increase in inflation of 1%, or the same 1% rise in the unemployment rate?  The answers vary somewhat according to the current macroeconomic context, yet it is almost always true that the vast majority of my students think that inflation is the real problem.

When pressed on why they think inflation is worse than unemployment, these students rarely suggest that inflation may hurt the poor more than the affluent (which would show a concern with income distribution), or seem to understand that moderate inflation might be good. They have no idea that deflation is considerably worse than inflation, because deflation causes severe unemployment. They seem to think that unemployment levels have little effect on them; after all they are getting a college education (not much of a guarantee of security these days, but I leave that issue for another post).

I tell them a personal story about inflation and unemployment, apropos to a blog on full employment, which illustrates why they should be concerned with unemployment. In the fall of 1999, fresh out of graduate school, I was hired as the Assistant Director of a small think tank. As I learned afterwards, there had been five other candidates for the position. (The average unemployment rate in 1999, I might add, was approximately 4.2% [see here]). As it turns out, I had another interesting piece of information that one seldom has about a particular position: the number of applicants for the same position the previous time it opened, in 1995.

The rate of unemployment in 1995 was around 5.6%(here again) — 1.4 percentage points higher than in 1999. I ask my students: how many people do they think applied for that same position back in 1995? They never come close to the 300 or so that vied for the job. In other words, in this particular case, a 1.4 percentage point higher unemployment rate created an overwhelming difference in terms of competition. Of course one cannot, and should not, generalize from one observation, but the anecdotal information fits the more substantive evidence that in the tight labor market of the late 1990s, we actually saw increases in real wages for average workers in the Unites States.

If for no other reason, students, and everybody else, should be concerned with unemployment, because an increase in the unemployment rate of 1 percentage point can hurt considerably more than an equivalent change in prices. But even further, it is important to remember that whereas inflation hits everybody more or less equivalently – even people with different consumption baskets – unemployment is a divisive social problem, which makes some ‘losers’ and others ‘winners’ (e.g. “immigrants rob our jobs”).

It is for that reason that full employment is the single most important economic and social policy, and the foundation on which to build other policies. Work defines our lives, to a great extent, and gives dignity to people. And I do not mean just the poor. As I tell my students, I am a big believer in the ethics of hard work, and that is why I think rents and wealth should be heavily taxed, so that everybody needs to work to earn a living. That would be full employment for all!

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2 Responses to “Full Employment: Why Does it Matter?”

  1. Robert

    Great article! One difficulty to overcome is the misinformation distributed by the petroleum/coal industries, as well as politicians and the media. All too often the arguments against regulations and the push towards cleaner energy are based on a false assumption that it will cost jobs. The most recent and disturbing example being the “Stop the War on Coal” act passes by congress a few months ago, where the industry was pretty much given immunity from EPA regulations. The bill blocks any regulations that would “hurt jobs” in the industry.
    Never mind the increased emissions which are not fully captured in the price of energy, the increased health care costs of the citizens who are being negatively affected by the pollution (again not captured by the cost of coal/energy), or the fact that most of land use rights were obtained and below true market value (again not fully capturing the true cost in the price of coal/energy). Sigh…


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