“It’s morning in America.” -President Ronald Reagan
Things are looking up for Americans. Overall the domestic economy is in solid shape. Gross domestic product is steady. Jobs are growing with population growth. Unemployment and inflation are holding steadily low. The stock market seems to hit a new record every quarter. Consumer confidence is high.
Sounds like a dream!
But will this economic fantasy transform into a nightmare soon?
No one can be sure, but economic theory provides us with some warnings.
When an economy expands at a steady rate with job creation matching population growth, there are enough people to fill job openings. The jobs are mostly filled, Americans are earning higher income from their jobs and are stimulating the economy. Companies are meeting economic demand with sufficient productive capacity. Conversely, an economic recession usually implies there are not enough jobs for all the people who desire them. However, the complete opposite scenario can be just as dangerous: if there are too many job openings for the amount of able and qualified workers, companies cannot meet consumer demand for their products with the necessary productive capacity.
In simpler terms, if there are not enough people to make your latte, assemble your automobile, or help you file your taxes, companies are clearly being stretched too thin. Consumers have too much disposable income on their hands to spend in the economy compared to how much product companies can provide those consumers. Companies can hire less qualified workers or increase investment in training, but those are imperfect or non-immediate solutions. In addition to a lack of available workers, excess consumer demand can strain supply chains meaning there are not enough factories or product lines operational to produce enough goods for customers–companies are at their productive capacity. How can a company afford to increase capacity? It can raise its prices which will help it invest in production but will also slow demand. Furthermore, factories cannot be built overnight. This causes an inflation in prices and not an immediate providing of increased supply. Hiring workers who do not exist is not possible, and building factories is a long-term solution. Thus, companies are left without any options but to leave prices inflated and consumer demand unmet.
This scenario is known as economic overheating. The economy is running “too hot” for its own good. Consumers have too much demand for the available supply. Inflation begins to tick upward exponentially fast. This is why the Federal Reserve bank typically steps in as an economy grows faster and faster to raise interest rates and slow consumer demand.
The current economy in the United States seems not to be in this overheating scenario as of yet. Inflation is below the Fed’s target even as it increases interest rates slowly over time. Wage growth is not near peak levels which would normally mean companies are beginning to compete over the few available workers, but the slower wage growth could also be due to workers being afraid to leave and switch jobs after still feeling insecure from the 2008 recession.
But there is a warning sign:
There are six millions job openings as of December 2017.
Source: Bureau of Labor Statistics (BLS)
With the unemployment rate at its lowest point in a decade or more, there seems to be either not enough workers to fill those jobs or they are not qualified enough or do not have the information to obtain those jobs. The latter theories are what is known as structural unemployment–problems beyond the mere health of the economy. Evidence for this hypothesis can be seen in the fact that there is still a higher-than-usual amount of Americans working part time for economic reasons.
Either these workers lack the skills and education for available jobs, or they are not aware of those job openings or are not in the right place to obtain them. With 7.5 million people unemployed and 5.5 million underemployed with 6 million job openings, there are indeed enough Americans for the jobs. Some economists ponder that companies are demanding too strict of skill sets for certain jobs. Regardless of the causes, if these workers cannot reach these jobs, it is as though the available labor does not exist. This scenario can trigger economic overheating if consumer demand is too great.
So how does the nation prevent this doom from materializing? First, the Federal Reserve must operate diligently to control inflation and any overheating. There also should not be a rapid stimulus to the economy at this point as such could set off quick overheating; I will also discuss this issue specifically in regard to tax cuts in another article soon. Furthermore, we must encourage government and business investment in skills training and in information transparency about job openings so as to reduce any structural unemployment. With so many variables in this social science, it is impossible to discern exactly what will happen. But we can prepare to prevent a nightmare.