Tuesday, September 16, 2008

Why the Macroeconomic Policy Goal is LOW Unemployment, Not NO Unemployment

Most economists consider it natural and good to have a certain amount of frictional unemployment. Having a pool of people looking for jobs makes it easier for businesses to hire new workers. If everyone who wanted a job had one, a business that needed to hire more workers would have to lure them from other companies or from the pool of adults who are not in the labor force. This would probably mean the business would have to offer to pay significantly more than the current market wage. Wages are typically based on productivity. Paying more to workers simply to hire them away from another company (and not because of increased productivity) contributes to inflation. Consequently, attempts to reduce unemployment generally focus on cyclical or structural unemployment.

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