UNEMPLOYMENT & THE MACRO ECONOMY
The overall

UNEMPLOYMENT & THE MACRO ECONOMY

The overall

The overall macro economy is most fundamentally driven by demand, and constrained by supply. If wishes were horses, poor men would ride, and we might all live in villas, with Gulfstream jets to whisk us off for the weekend. Our ability to fulfill our potentially unlimited demand for goods and services is constrained by the limited supply of these things. We go to work to produce the supply, and our paycheck determines how much of that supply we can afford to consume.

When the macro economy is described in this way, it might seem that unemployment is inherently contradictory. We all want more goods and services, which might imply that everyone could work to provide them, limited only by the point at which our demand for leisure exceeds our demand for goods. In practice, however, goods have a real cost, and consumers may not be able to afford (or be willing to pay for) the potential supply. Moreover, information about supply and demand moves imperfectly through the economy.

Even in a “full employment” economy there is some unemployment, as new workers enter the work force looking for jobs, or people change jobs. The longer the time it takes to find a job, the higher the unemployment rate will be. However, if people are not working (even if merely between jobs) they are noet producing goods and services, and also have less income to buy goods and services.

In general, therefore, unemployment is inverse to GDP growth. If unemployment is high, purchasing power in the macro economy will restrained, thus effective demand, and GDP growth will slow or even go into recession. If unemployment is low, the economy will be infused with purchasing power, and GDP growth will be higher. The inputs on each side of the cycle (wages and the supply of goods) become the outputs for the other side.

Consider, for example, the familiar inventory recession. Manufacturers as a group produce more than their employees as a gro…

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