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Understanding The Job Market

What could be the unemployment rate tomorrow? Today’s figures concerning the job market have become extremely difficult to analyse and the common relation between inflation and labour factor tends to disappear, probably relegated to the historical economic theory. Why? Because new elements that composed the labour function have completely changed the fundamentals of the macroeconomic theory, notably the notion of natural unemployment, also called NAIRU. We have now entered into a modern structure of the job market, essentially based on destruction and creation with a relatively low replacement rate.

Before all, we must define assumption that will be used to stabilized the model. Usually economic models consider that information asymmetry reduce the efficient of the job market. We believe that right now the information flow is extremely good, an assumption that should obviously lower the value of the NAIRU. However, we can add a new factor, which has an impact negative on the job market.

The idea is relatively simple. If we assume that the renewal movement observed in the job market intensifies with the degree of innovation, it also implies quality changes that obviously would be affect negatively by static education program. As fast as the innovation integration goes, as fast must the workforce modify its structure. This modification depends on public expenses, since most of the program and improvement of education program are financed by taxes. Therefore, opened fiscal policy used to stimulate classical industry forces also public authorities to proceed to a difficult choice.

We obtain then:

U is the unemployment rate, B is the public budget and alpha’ is the IT innovation growth factor. We now have to define an additional data that would ensure us to capture the idea of education model in the labour market function. To do so, let simply assume that the public budget is composed by two different variables, one related to the education budget, and another correlated to the unemployment benefits. Those two characteristics have an opposite evolution, but cannot be neutralized in term of budget function. We Obtain then:

Gamma is a coefficient that measures the impact of the education expenses on the public budget. We supposed that the more intense is the education program during the previous period, the minimum will be the asset allocated to the public budget used to reduce the negative effect of the innovation absorption on the job market function.

Theta is the coefficient corresponding to the unemployment benefit, or public expenses allocated to the weakness of the job market. Of course, this variable cannot be dissociated from the previous one, since the education program set during the previous period has an impact on the amount required to maintain healthy consumption by redistributing income to non-workers.

At the end, we clearly observe that fundamentally, if innovation in term of technology asset reduces the initial assumptions used to determine the NAIRU, we can also remark that an absorption crisis can lead to a sharp improvement of the optimum unemployment rate added to sliding public expenses. Those two equations explain for instance why the US job market remains flat despite a significant rebounds of the GDP. This situation is also the case for most of the European countries, excluding the ones that import high quality human capital to offset the lack of quality employees. The major problem is that there is no stabilization of this factor, since quality allocation regarding public expenses is extremely difficult to improve.

Two solutions arise. One is to proceed to an impressive increase of the education program, but the impact will only be measured at the next period, which is difficult to determine, because actually we have opted for a period characterized by a new innovation cycle. Let’s assume that according to the recent researches, the new innovation cycle will be the emergence of wireless communicators used for the entire computing related environment. The other solution is maybe easier to put in place. The idea is to simply limit the penetration of the innovation in the economy in order to reduce its impact on the job market. Usually, the simple existence of the price model unaffordable creates this effect, and therefore leads to a slow penetration. Today it’s not the case because the financial system put a lot of pressure on creativity, forcing innovators to ensure quick return on investment and by the way lowering the average selling price in order to maintain strong volume. The current product line transition concept used by industrial analyst is almost obsolete since we observe only one entry line and one low end line without any middle product range. This is due to the absence of product maturity, extremely typical in IT. Based on those remarks, it appears that in order to limit the penetration, we can simply ease the financial system by increasing the direct financing technique for innovation program. In other words, encouraging expensive and long term innovation program allow policy makers to reduce the risk of absorption crisis coming from undesired low volume of cheap IT products.

In the lights of those comments, we can now define an optimum for the labour function in non-cyclical environment. Starting from the initial definition.

We have only three variables, which are theta, gamma and alpha. It’s very important to remark that in our model, the classical growth factor of the industrial economy (excluding the impact of IT innovation on the global growth) doesn’t interact because from one period to another, its impact is not significant when its value is comprised between minus 1 and 1. Let’s remind you that the equation used to define our growth factor for the economy is:

A is the global growth factor, Beta is the budget function, the first alpha represents the industrial growth factor although the second element depictures the IT innovation growth factor.

For the last ten years, any OECD countries have reported a value of industrial growth factor that doesn’t exceed that range. We can point out also that two periods are necessary to measure the impact of new public policy on the interest rate.

So, what all this means. First it’s crucial to understand that education programs used today are supposed to become growth factor tomorrow and element of the labour market function within the next two periods. As results, if a country economy is not strong enough to produce educated employees, it has to ensure salary level that would attract sufficient labour force to offset this effect. The second point would be more related to the forecast of the unemployment rate. Measuring the job market quantitatively is a difficult task, especially when we try to define it based on innovation factors. But we can use this model to adjust long-term economic policy (above two innovation periods) to influence precisely the economic path. Our last remark will be to encourage people to keep improving their knowledge. Most of the efficiency obtained by using this model is based on the idea that citizens have the willingness to learn by themselves in order to offset the weakness of common educations program.

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