Originally posted by: xxxxxJohnGaltxxxxx
..just my $.02 while I finish my steak and cheese sub
Though the theory of ?Full Employment? is fundamentally flawed, for the most part, economists consider the natural rate of unemployment to be between 4-5% (rough estimate, as this number changes proportionately with productivity, technological gains, et al.).
When the ?Tech Sector? was booming and people were investing millions and millions on speculation in companies that have never turned a profit, the economy was, for lack of a better word, booming. Clinton, of course, received credit for the red-hot economy. At one point, unemployment dropped to something like 3.8%, which, as any economist would argue, is not sustainable (the basic economics 101 premise of too many dollars chasing too few goods?every one has money?everyone wants goods and services?demand is increasing?prices are increasing?wages are going up?something will eventually give, which is why you saw Greenspan increase interest rates during this time in an effort to bring us closer to the proverbial market equilibrium).
As unemployment drops below the so-called natural rate of unemployment, intuitively, there is an upward pressure on wages (employers must compete in a market with a dwindling supply of labor). Conversely, as the unemployment rate increases above the natural rate of unemployment, there is clearly less of a demand for labor and thus the bargaining power of the laborer is diminished. Moreover, in the absence of inflationary pressure, prices are assumed to be low. Wages are a function of both 'prices and marginal productivity' (W/P whereby W=actual wages;P=Prices; W/P=MPL, or real wages=marginal product of labor.). In addition, there is also a substitution effect in many labor markets where capital and labor are thought to be compliments (as the price of capital decreases relative to the cost of labor, the demand for capital increases and thus the demand for labor decrease, all else constant).
Given the little risk of inflation right now and the low interest rates (and the minimum wage), there is just simply not as much demand for labor as there once was?this, of course, equates to less pressure on employers to increase wages in a lackluster labor market. In short, I would argue that this is just another one of those ?supply and demand thangs.?