Economics concepts and applications

¶ … real cause of unemployment is productivity, not offshoring (Nussbaum, 2004). According to the article, one percentage point of productivity growth can eliminate approximately 1.3 million jobs a year and with our annual growth rate of productivity of over three percent versus. An expected two to two and a half percent, it's no wonder we're losing jobs. Nussbaum takes a very positive view on productivity, citing benefits of lower inflation, higher profits, rising stocks and higher housing prices. He believes that this generation in wealth will eventually lead to significant employment generation in the United States. Today, there's little evidence to support the accuracy of Nussbaum's analysis, but the future may prove that the author is correct.

Unemployment occurs when the supply of labor exceeds the demand for it (Unemployment theories - causes of unemployment - whose fault is it?). On the demand side, when there isn't enough demand employers will not need as many workers, and demand-deficient unemployment results. Unemployment caused by supply-side factors results from imperfections in the labor market. A perfect labor market clears so that supply will equal demand. but, if the market doesn't clear properly, unemployment will result. For example, wages may not fall properly to clear the market.

Nussbaum's productivity theory in Business Week, is an example of demand-side unemployment. As productivity has risen due to advances in technology, less labor is required to reach a given level of production (the Demand for labour). Nussbaum is optimistic about the outcomes of productivity. In the long-term, rises in productivity raise the demand for labor by reducing the wage rate relative to the value of the product. Next, as corporations generate profits, market processes will move in to eliminate them. As this happens, the demand for labor will increase.

However, one weakness of Nussbaum's productivity assessment is that it's not clear from the demand-side analysis of unemployment which workers will fill the increase in demand for labor, Americans or foreign workers. Because there appears to be an abundant supply of foreign labor, the real question is if rising productivity at home will be enough to offset the advantages outsourcing to foreign countries can offer in terms of net cost savings.

Further, experts state that the United States economy should be creating 250,000 jobs a month or more by now (September job growth weaker than expected).

Yet, only two months of 2004 have met this goal. United States businesses added just 96,000 jobs to payrolls in September, 2004. One has to wonder when Nussbaum's rosy long-term employment scenario will materialize.

Inflation is defined as a sustained increase in the general price level (Inflation - explanation).

It is measured as the annual percentage increase in prices and the most often quoted figure is the annual change. The prices inflation usually measures are retail prices. Unemployment is one of many factors that impact inflation. Typically, unemployment and inflation are opposites except in instances of stagflation where these two variables rise together. If unemployment goes too high, inflation goes down, because high unemployment drives wages downwards. Price decreases follow because goods are being produced so economically that prices can fall and producers can still make a profit. This generally happens after major productivity enhancements as Nussbaum points out in his article.

Unfortunately, factors other than productivity such as higher energy and commodity costs are having a significant impact on inflation (Kirchhoff and Hansen, 2004). The median forecast is for the consumer price index to rise three percent in the twelve months ending in September 2004 and 3.1% in the year ending in December 2004. Earlier projections had been 2.4% and 2.6%. Whether inflation decreases or decreases depend on if the factors pushing inflation higher are "transitory" or permanent.