Is it true that Capitalism requires 5.5% unemployment?

Is unemployment actually bad?
My professor claims that capitalism must have 5.5% unemployment to function properly. The idea he summarized was that with unemployment lower than 5.5%, this would lead to massive inflation and that would decrease the value of wages of all the workers.
Economists/sociologists here, is this true? Does it have any basis?
This fall we had something about 10,7%? Obama did his best to lower it.
What may you say about the issue in the USA nowadays??

 

I've heard that number too in an economics textbook but I think it was 5%. The reason for it has to do with the free flow of labor, there has to be someone to replace the employed if they become sick or unemployable for some reason or another. If we think about it in terms of theory, if everyone had a job, what would happen if one of them broke their leg and couldn't do their job? Who would replace them?

 

Is he an economics professor? Inflation happens when there is more money chasing the same amount of goods or services. So we can surmise that if more people work and earn, rather than receiving nothing or a low government subsistence, there would be more money changing hands in the economy and pressuring prices upward. But massive inflation as a result? Doubtful and there would need to be other driving factors to put that much pressure on prices besides low unemployment, such as shortage of manufacturing capacity to meet the demand.

The decreasing value of wages of all workers due to low unemployment is contrary to economic understanding. When more people work, the available workforce remaining to still need a job shrinks, thereby driving UP wages for employers needing more people due to the higher demand from more workers earning and spending. So employers end up paying a premium when there are more jobs than workers, which is what happens in heavy expansion periods like we had prior to 1970. Until women entered the workforce in large numbers and men took on additional jobs, there was a steady increase in wages because skills were needed across the economy, creating competition for workers. Once the number of workers outstrips the number of jobs, then wages can fall again until they reach an equilibrium.

Flooding an economy with workers, especially if they were skilled workers, would drive down wages because more people would be both willing and capable of doing the work, so they could compete for that work by agreeing to lesser terms with employers to undercut other competitors for the jobs. Nothing about low unemployment drives wages down and governments have to be careful during growth periods not to drain the economy of workers by hiring them as government employees because government should never compete with the private sector since government is never as efficient as the private sector at much of anything.

 

Actually the current unemployment rate is 5.4%, the only economy to ever achieve 100% employment are planned economies where everyone goes too work, goes the military, or goes to jail like in the old soviet union. but in a market economy like in the USA 100% employment would suggest a lack of innovation, and stagnation, nobody is being fired because of new technology, or changing jobs because they finally graduated school.

Depending on if you are studying Keynesian or classical economics near perfect employment rates vary and their relationship to inflation changes also, most likely your still studying classical economics, and they place that number much higher like the 5.5% your teacher said, a Keynesian economics professor would suggest its around 2-3%, of course, in the end, these are all just theories.

 

Different countries have had unemployment levels between about 2% and 7% and had things functioning close to fine. Also, unemployment is a very noisy statistic, so I'm not sure how one would get anything as precise as saying that things work at 5.5% and not other numbers. If someone wanted to say that the optimal level is around 5% that would make more sense and might be a meaningful argument.

 

Yes, some unemployment is necessary for capitalism to function. If there were 100% employment then firms would compete amongst themselves for labour. The price of labour would skyrocket based simply on the twin laws of supply and demand. Why does a neurosurgeon get paid so much? Because there aren't that many of them. Why do unskilled labourers get paid so low? Because there are plenty of them. If firms were bidding for labour then that would be inflationary and cause immense problems in a capitalist economy. There has to be unemployment.

 

Never believe what liberal college professors tell you about economics.

Just nod your head and agree with whatever they say, get your "A", and go away laughing at them in silence. Its how I finished my undergrad with a high GPA.

 

there is always about 5% out of work looking for a new job..this 5% is short term unemployment...what we have now is not this....its a lot higher...and more are working part time because that is all they can find...

 

Before unemployment benefits and wage laws, unemployment was less than 2%(1920's).

 

I heard 5% too. But the reasons were different. I think I first heard of that 5% mark during Eisenhower's administration. How it is almost impossible to get unemployment below that mark.

 

Chicken or the egg??? Capitalism is the free flow of a private economy. Yes, if employment rates are low, employees have more power and more people have money to spend, then a higher GDP. When too many people are unemployed, less money goes into the GDP and employers hold the power, but less reason to grow or expand. Check the chart out and you'll see the lower rates of unemployment follow higher growth and profit patterns.



http://www.bing.com/images/search?q...934&thid=JN.S2TweMS9w9Nu9CIiD6RewQ&ajaxhist=0

 

yes that was a result of the roaring twenties which led to the great depression, as oppose to the even lower numbers of unemployment in the early 1940's after the New Deal (which were the lowest unemployment numbers in our history) whose policies did not cause a market crash, and instead led to the prosperity of the 50's and 60's.

 

Nonsense, unemployment stayed higher before WWII. After the war, we were the last man standing, but rates grew gradually as Europe recovered.

 

no you fail

 

Very interesting thread!

 

I'm not too sure what the reason for the number was, but I think that's what it had to do with. Either that or I just made it up to justify what I read.

 

LOL, I don't know the reason either. But like you, that 5% number is embedded in my mind. You know what it might have been, if I remember right. 5% unemployment was considered full employment. In other words, everyone who wanted a job, who wanted to work was working. Trying to think back 50-55 years when I was growing up isn't that easy of a task. But I think that was it.

 

Great graf or chart. I think it shows what I heard in the 1950's was probably correct. That it is almost impossible to get unemployment under 5% and the 5% mark back then was considered full employment. At least that was what I remember I heard.

 

/thread

"Capitalism" most certainly does not require 5% unemployment to "function." Low unemployment -can- lead to inflation, but this has little if anything to do with capitalism "functioning" or not. Just another boneheaded LW professor spouting nonsense.

 

is there really a difference between a "liberal professor" and just any professor? Aren't you just sayng you think the intellectuals are just devil worshipers and if more people would live according to your magic book the bible we'd be better off?

 

You most likely took an ECON 101 class in college which usually teaches the basics of classical economics, but I should point out there is a huge debate going on amongst college business, finance, and economics academics about which to teach Keynesian, classical, neoclassical, or even another form of economics.

 

A vast majority of social sciences professors are doctrinaire LW and vote LW. That's a cold, hard fact no knowledgeable person will dispute. Public grant money is how their bread is buttered. Your second sentence is just more of the typical moronic exercise in straw man on display daily here from the LW. I'm an atheist.

 

source?

 

I read that in an industrial developed nation unemployment won't get lower than 5%. No reason was given. Interestingly, Singapore's unemployment rate is usually under 2%.

http://www.tradingeconomics.com/singapore/unemployment-rate

 

No, the drop occurred preparing for the war. The early 40's reflect the inlistment period. The first new deal was short lived. The second was proceeding the same, then WWII hit and changed the dynamics. No one attributes the end of the GD to the new deals, it was the war. It sustained only due to Europe's destruction and rebuilding.