lectur1-page5 - and 4 employees at the furniture factory...

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The national unemployment rate is another “vital sign” of the U.S. economy. Full- employment in the economy is generally accepted to be 5.0% unemployment. Unemployment rates below 5.0% tend to result in increased pressure on inflation due to wage increases as producers compete with each other to find qualified labor to expand production. From 1992, the national unemployment rate had been generally decreasing, even dipping below 4.0% to 3.9%. Again, our friend, productivity growth has been the “pressure relief valve” for inflation pressures. Enhanced productivity allows workers to produce more within the same hour of Enhanced productivity allows workers to produce more within the same hour of work, so employers can afford to pay workers more without having to try and pass the increased labor cost on to consumers in the form of higher product prices. For example, let us assume that the wage rate at a furniture factory is $10.00 per hour
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Unformatted text preview: and 4 employees at the furniture factory can produce a two reclining chairs per hour. Labor cost per reclining chair is $40.00/2 chairs or $20.00 per chair. Now, let us increase the wage rate to 14.00 per hour and introduce new technology that allows the four employees to produce three chairs per hour. What is the labor cost now per chair? $56.00 / 3 chairs or $18.67 per chair. So even though the wage rate increased, the labor cost per chair decreased due to increased productivity pursuant to the use of new technology. We again saw unemployment rise during the 2001 recession, but then quickly decrease again. In this case, the productivity gain may allow for increased profits, or possibly lower prices to consumers. So today, even the 5.0% unemployment “benchmark” is being questioned. But again, will 5 the 5.0% unemployment benchmark is being questioned. But again, will productivity growth continue at its current pace?...
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