Question.3078 - Is a 4.0% unemployment rate a feasible goal? Why or why not? Why is the increasing national debt a concern?
Answer Below:
Is a 4.0% unemployment rate a feasible goal? Why or why not? Unemployment refers to that portion of the labor force that does not have jobs and are available for work. Assessment of the unemployment rate is important for checking scarcity as unemployment implies that all the human resources of the economy has not been optimally utilized which leads to less production of goods and services required by the economy. However, an economy can hardly reach a point where this rate can reach zero i.e. a situation where in the economy had utilized all its available human resources to produce the optimal amount of goods and services. Hence, according to the labor market equilibrium every economy can attain full employment even when it reports certain unemployment rate. Full employment is defined as the situation where the economy is utilizing all available resources to produce the potential level of output it can attain. At full employment level every economy has a natural rate of unemployment which is acceptable as the economy still produces the potential level of output. The U.S. economy still reports the official unemployment rate as 7.9%. Including the part-timers who would like full-time work and discouraged workers who have stopped looking, this rate would hover around 14.4%. The democrats as well as the Republicans want more jobs to be created and want the unemployment rate to come down to 4%. The recession has changed the psychology of the Americans from being a bullish, risk-taking society to a bearish, risk-averse one. In other words, the US society has been transformed from being a spendthrift one to one which has started to spend more responsibly. The higher savings have dragged the economy to slower growth rates as a result of curtailment of business investments and bank loans. Thus the reversed risk aversion attitude has limited the economy's expansion to rates of around 1% to 2% only. A bearish mindset has resulted in lower capital investment which in turn has resulted in a sluggish economy and lower job creation or higher unemployment rates. Thus, although theoretically, the unemployment rate of 4% looks feasible, because at this level the economy will be producing the optimal level of output, in practical sense, the goal looks difficult. Why is the increasing national debt a concern? When the tax revenue collected is less than the spending, the government needs to borrow money. The sum of money borrowed by the government from different kinds of sources is termed as National debt. If the GDP is 90 percent of debt level, it can be a major issue because GDP is a measure of the government’s tax base and decline in Debt – GDP ratio would indicate inability of the government to raise its revenue from taxes. Increase in national debt is a concern for the society, as increase indicates lower economic growth, lesser ability to meet the unexpected situation and financial crisis in the long run. Lesser economic growth will result in lower wages and salaries, unemployment and high inflation. Higher Inflation would reduce the purchasing power of the society and increase the risk of higher interest rate for the people to borrow money. Hence, rise in national debt is area of concern for the society.More Articles From Finance
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