TJP

Job Creation

Byron A. Ellis

Job creation is contingent on aggregate demand, and aggregate demand is contingent on income. When aggregate demand is high, unemployment is low. Thus, governments use fiscal and monetary policies to increase aggregate demand. Fiscal policy is under the control of the executive and the Federal Reserve controls monetary policy.

Aggregate demand, and hence employment, increases when the government increases spending or when the Feds increases the money supply. However, a very high level of employment may be inflationary.           

Most economists believe that there is a trade off between employment and inflation. They argue that there is a natural rate of unemployment. Meaning that some level of active job seekers, between 4 and 6 percent, will not be able to find work. Accordingly, the economy achieves full employment at this level of unemployment.

Some economist, however, have argued that the natural rate of unemployment, now called the non accelerate inflation rate of unemployment (NAIRU), does not exist. Furthermore, they note that the NAIRU is the actual unemployment rate, and when it goes up conservative economists raise the NAIRU. When if falls, they claim inflation is on the horizon.

Relatively high unemployment benefits the wealthy, particularly bondholders, since during this period interest on bonds are often higher. Additionally, high unemployment suppresses wages, which leads to higher business profits. So, the fighting inflation gurus should be view with some degree of skepticism.