Is Low Unemployment a Bad Thing?

by Advice Chaser
by Advice Chaser

In 2023, unemployment has been historically low at under 4%. That’s normally heralded as a good thing. Isn’t the goal of the economy to give everyone a job and a chance to succeed? Yet some analysts bemoan the low  unemployment rate, saying it will increase inflation or reduce overall growth. What’s the real story? Is low unemployment a bad thing, or can the economy improve without anyone losing their job?

What Does the Unemployment Rate Mean?

There are a few different ways of measuring the unemployment rate, but most of them measure people who are looking for work but have not found it. These are the people applying to jobs. If that number is low, it may be easier for workers to find jobs, but harder for jobs to find workers.

However, people who are not working or looking for work aren’t counted in this statistic. This includes students, retirees, full-time caregivers, disabled people, and people who have gotten discouraged and stopped looking for work. It also doesn’t include people who are underemployed: working fewer hours than they want, or for lower pay than they should be able to command for their skills.

An important number here is the labor participation rate. This is the percentage of adults who are either working or looking for work. This number is rather low at the moment, at 62.5%. About eight million people have left the workforce since the beginning of the pandemic. Some have simply retired. Some chose to stay home with children after their old childcare situation proved unstable. COVID-related health problems may have sidelined others. It is possible, though, that a strong economy with good wages could lure some workers back.

How Could This Be Bad?

Given the necessity of work for survival, it’s surprising to hear some economic analysts worry about low unemployment. After all, when people are working, they’re being productive and they’re getting paid. That means less money the government has to spend on unemployment payments and other aid measures.

One complaint is that the low supply of labor may make it hard for companies to hire new workers. It may be difficult to find the employees they need in the tiny 3-4% of the workforce that is still looking for a job. However, the low labor participation rate and the number of underemployed workers suggest that it might not be so dire as all that. The workers companies need may simply be working part time, at a stopgap job they don’t want to stay with, or for low pay. Or they might have given up on looking for work, but will consider working if the position is right. 

It is true that some companies, forced to pay more to new hires, may raise prices. That can drive inflation. But at this point, inflation in consumer prices has happened already. Wages need to catch up to prices in order for average people to afford anything.

Another worry is simply that these low unemployment numbers don’t paint a complete picture. In the face of high consumer prices, it’s not enough to have a job. Too many workers are freelancers, gig workers, part-timers, or other precarious workers whose income is low or unstable.

Still, It’s Good to Have a Job

Some economists, including within the Federal Reserve, have suggested the economy can’t be improved without increasing unemployment. The Fed has been raising interest rates in the hope of cooling off inflation, with the expected side effect of raising unemployment.

However, given the price increases we’ve already seen, it’s more important than ever to have a job. The tight labor market can make it possible to demand wages that match price inflation. Given that the current inflation problem has causes like supply chain disruptions and market manipulation, the unemployment rate may not have much effect.

So far, inflation is cooling somewhat while unemployment remains low. This is a positive sign for the economy, showing it may be possible for price spikes to slow without anyone having to lose their job.

Economists disagree on what happens next. Will there be a recession after all, possibly later this year? Or will we reach a “soft landing” in which inflation cools down without negative side effects? It’s impossible to say. In the meantime, it makes sense to keep your career on a good footing, fill up your emergency fund, and have a balanced portfolio. These are strategies that will keep you financially stable in any economy.

Are Your Finances Secure?

In an uncertain economy like ours, it’s always wise to keep yourself in a sound financial position. This means minimizing debt, saving a portion of every paycheck, and investing what you have. To make sure your finances are ready for whatever comes, schedule a meeting with your financial advisor. If you don’t have one, we can introduce you to the right person for you when you contact us.

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