Underemployment Equilibrium
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Underemployment equilibrium, also referred to as under-employment equilibrium or below full employment equilibrium, is a condition where employment in an economy persists below full employment and the economy has entered an equilibrium state that sustains a rate of unemployment above what is considered desirable. In this state the unemployment rate remains consistently above the natural rate of unemployment or non-accelerating inflation rate of unemployment (NAIRU) because aggregate supply and aggregate demand are in balance at a point below full potential output. An economy that settles into an underemployment equilibrium is how Keynesian theory explains the occurrence of a persistent depression in an economy.The term "underemployment" in this sense simply refers to the fact that total employment is under the level of full employment. Underemployment itself is a distinct term that refers to employed workers who are working fewer hours than they would like or in jobs that require lower skills (and often come with lower pay) than their education level and experience would indicate. Underemployment may be included as one component of the general unemployment rate, but is otherwise unrelated to the concept of an underemployment equilibrium, though these two uses are often mistakenly conflated by those unfamiliar with economics.
Definition
Labor surplus equilibrium, also known as underemployment equilibrium or wage deficiency equilibrium, refers to a state where the employment rate in an economy remains persistently below full employment, maintaining an equilibrium with an unemployment rate higher than what is considered ideal. In this state, the unemployment rate stays above the natural rate of unemployment or the Non-Accelerating Inflation Rate of Unemployment (NAIRU), as total supply and total demand balance at a point below full potential output.
Origin
The concept of labor surplus equilibrium originates from Keynesian economic theory, particularly during the Great Depression of the 1930s, when economists began to focus on the phenomenon of persistent economic downturns. Keynesian theory emphasizes that insufficient aggregate demand can lead to prolonged unemployment and economic stagnation, providing the foundation for the formation of labor surplus equilibrium.
Categories and Features
Labor surplus equilibrium can be categorized into two main types: one caused by insufficient aggregate demand leading to unemployment, and the other caused by structural issues such as technological change or globalization. The former can often be alleviated through fiscal and monetary policy stimuli, while the latter may require longer-term structural reforms. Its features include high unemployment rates, low inflationary pressure, and slow economic growth.
Case Studies
A typical case is the Great Depression of the 1930s, where the U.S. economy experienced prolonged high unemployment and low economic growth. The government implemented the New Deal, increasing public spending and job opportunities to gradually recover from the depression. Another case is post-2008 financial crisis Europe, where many countries faced high unemployment and economic stagnation, and the EU responded with a series of fiscal austerity and structural reform measures.
Common Issues
Investors often misunderstand the relationship between labor surplus equilibrium and underemployment when applying this concept. Labor surplus equilibrium is unrelated to underemployment, which refers to workers having fewer hours than they desire. Another common issue is overlooking the long-term impact of structural unemployment, as relying solely on short-term policies may not address the root problems.
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