Facts About Jobs: Why Low Unemployment Has Downsides

When jotting down a list of facts about jobs, you may not believe that low unemployment has many downsides. 

You may think that if everyone is working, then people can afford necessities, they will spend more on goods and services, and drive the overall economy to new heights.

While it is true that more people being employed means more money being spent, there are several downsides to unemployment that have wide-reaching implications on all of us.

Employees Can’t Keep Up

One cause of low unemployment is the advancement of new technologies driving job growth. During the industrial revolution, people feared that machines would lead to mass unemployment. But the opposite proved correct. While some jobs were lost, a greater number of new jobs took their place. 

The same is true today, but with a few caveats. 

Firstly, there aren’t enough workers for the job available. Ignoring coronavirus’s impact for just a moment, in 2019, the pool of available candidates shrunk to record lows. This is partially due to people having fewer children, an aging population leaving the workforce, and a boom of innovation that has created millions of jobs across a range of industries in a short period.

So, just like in the past, innovation is driving growth across many sectors. But the new jobs being created require a higher degree of skill that people lack for one reason or another. So it isn’t just a matter of having more people. The people that companies need require skills that can take years to develop – soft skills, in particular, are in high demand but not at a high enough skill level in every candidate.

More problematic is that new workers coming out of high school and college aren’t able to keep up with the expectations put upon them in entry-level jobs; they don’t have the experience or knowledge to complete work effectively.

Likewise, older employees or those in other departments within a company are being tasked with roles they are unfamiliar with. This may include learning an entirely new job while needing to keep up with their existing responsibilities.

Assuming employees don’t burn out, or the quality of work doesn’t suffer, the employee may begin to demand higher wages or use their new experience to leverage a better offer from another company, leaving a company that is already short-staffed in a tricky position.

All of this leads to reduced productivity. 

Productivity Suffers

When unemployment gets too low, additional jobs fail to produce enough productivity to cover the cost of the work being done. You can’t just add more workers, either. Adding more workers (who are potentially inexperienced) causes an company’s resources to become underutilized.

Other causes of poor productivity are higher demand for employees leading to competition among companies. Job applicants are more valuable, which contributes to higher wages. However, due to budget restrictions, more inexperienced candidates who are not able to do a job as well may be hired instead. These workers cost more and may produce less value than their wages and benefits.

Inflation and Recessions

Due to a large number of job openings, there aren’t enough people to fill roles within companies to adequately complete tasks. This leads to low productivity among existing workers and increased spending, which worsens inflation.

If inflation gets too high, lending becomes more expensive as interest rates increase to match the Federal Reserve rates. This can cause an economy to fall into a recession, where the overall economy shrinks, and innovation begins to lag. The result is a large number of job losses as companies are forced to save money by cutting wages, hiring, and investments into the business.

According to Mark Hulbert of Marketwatch, the S&P 500 sees optimal returns when unemployment sits around 7.2%. This falls to 2.8% growth when unemployment is just 4%. In 2019, we saw numbers just below 4%. As of writing this, unemployment is around 11% due to COVID-19.

Final Thoughts

The economy goes through cycles, from expansion to recession. These are not easy to predict. If they were, you could easily become the wealthiest person on the planet.

Solutions for low employment can include pursuing even more automation and seeking out remote workers in your country or globally. However, these creative solutions do require people to manage them and can result in new challenges that many businesses will struggle to overcome.

While COVID-19 has changed the landscape and lead to unemployment numbers in the double digits, those numbers could fall quickly. For now, companies should take advantage of the greater availability of workers, begin staffing for the future, and find solutions to future labor issues.