For years, the talk was about lowering unemployment numbers. The first Friday of the month would come, and all eyes would be on unemployment numbers. How many jobs were created this month was the metric used to diagnose the health of the economy. As the economy improves, the numbers got higher and higher. But now too many jobs can be detrimental to the economy and actually slow it down.
New unemployment low
In 2017, the U.S. economy added 1.2 million jobs. The current unemployment rate sits at 4.3 percent, a 16-year low. The numbers are impressive. President Donald Trump is taking all the credit, but the numbers are on par with almost the same amount of growth in July 2016: 184,000 vs. 187,000.
These figures, however, don’t tell the whole story. The unemployment rate doesn’t take into account all workers who have given up looking for work, who are called discouraged workers. Discouraged workers number 536,000 in the latest jobs report, and that number hasn’t changed since last year.
Another number to consider is the number of long-term unemployed, that’s people out of work for 27 weeks or longer. The number didn’t budge from 1.8 million from June to July. The total number of unemployed workers is 7 million.
Too many jobs?
There is such a thing as too many jobs in the economy. Economists warn that when unemployment falls below the 5 percent level, the economy reaches maximum employment. The problem is that there is no way to know when maximum employment is reached; the only clear way to tell is when prices start rising due to inflation.
When jobs are created that aren’t productive enough to cover costs, they become inefficient. This is called slack. Ideally, there is no slack because the economy is at maximum employment. Slack is calculated by subtracting the figure of total employment from the sum of total unemployment, including hidden unemployment, which includes discouraged workers and part-time workers seeking full-time work.
The slack is the output gap. The output gap can go both ways, and neither of them is good. A negative output gap means that the economic resources are being underutilized. A positive output gap occurs when the economic resources are being overused and becomes inefficient; this can be caused by falling unemployment.
Rising wages
While all the outcomes of falling unemployment may seem negative, not all of them are. Wage inflation will start to occur as the unemployment numbers fall. With a higher demand for workers, companies will be forced to increase wages in order to keep their current employees and attract new workers.
While this may be good for the wallets of the workers, it doesn’t always turn out too well for companies. It can reduce productivity in smaller companies — they will pay less competitive wages when compared to larger companies, which means that they will be attracting less talented workers. Their profitability also will be hit as higher wages take up a larger portion of their profits.
What’s next?
Falling unemployment numbers can become a problem for the economy. While there are still a large number of unemployed, the more jobs that are available will create a scarcity of more talented workers. This will cause a rise in wages as companies compete for talented workers.
The problem is that there are still 7 million unemployed in the U.S. While more jobs are created, it can become detrimental to companies trying to cope with rising wages and shrinking profits. As the unemployment rate falls, companies will be forced to make hiring decisions that may hurt their own companies.
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