What is Full Employment?

Interesting post by Alex Tabarrok of Marginal Revolution. Here is what I usually say about it in class:

Full-employment unemployment rate-The lowest rate of unemployment compatible with price stability.

Price stability-An annual inflation rate of 3% or less (The Fed now goes for 2%). Inflation is when prices rise throughout the economy.

So the full-employment unemployment rate tells us how low the unemployment rate can be and still have a low rate of inflation. Economists are not sure what percentage it is. It is probably between 4% and 6%.

The Natural Rate of Unemployment Rate-Another name for the full-employment unemployment rate. It is normal or natural to always have some unemployment since every year we have seasonal, frictional and structural unemployment. The factors that cause seasonal, frictional and structural unemployment occur naturally, every year in our economy. So we really can’t have a 0% unemployment rate.

 

The relationship between unemployment and inflation

The graph below shows short-run the relationship between unemployment and inflation.

First, the labels in the graph need to be explained:

AD-aggregate demand or the demand for all goods in the economy, not just one.

SRAS-short-run aggregate supply or the supply of all goods in the economy, not just one. 

P and CPI-The price of all goods in the economy. CPI stands for Consumer Price Index and it is an average of all the prices in the economy.

Q-The quantity of all goods. That is why it is also labeled GDP.

If government spending increases in the graph below, AD increases and Q or GDP will increase. That will lower the unemployment rate. But if AD increases too much, then prices rise too much.
 
Tabarrok talks about how costs in the economy can change, thereby changing the natural rate of unemployment. If it costs less to search for jobs or applicants, then SRAS will shift out to the right, lowering prices and unemployment. The natural rate falls.

That does not mean that last year monetary policy (which can also increase AD) was too conservative. If the Fed had increased the money supply too much last year, then inflation would have been too high last year

The Making of the World’s Greatest Investor

By Gregory Zuckerman of The Wall Street Journal. He has written a book about mathematician Jim Simons. Excerpts: 

"Mr. Simons is considered the most successful money maker in the history of modern finance. Since 1988, his flagship Medallion fund has generated average annual returns of 66% before charging hefty investor fees—39% after fees—racking up trading gains of more than $100 billion. No one in the investment world comes close. Warren Buffett, George Soros, Peter Lynch, Steve Cohen, and Ray Dalio all fall short."

"Mr. Simons amassed a $23 billion fortune"

"Mr. Simons both anticipated and inspired a revolution. Today, investors have embraced his mathematical, computer-oriented approach. Quantitative investors are the market’s largest players, controlling 31% of stock trading"

"During the Cold War, he broke Russian code working for an organization aiding the National Security Agency. At 37, while running Stony Brook University’s math department, he won geometry’s highest honor, cementing his reputation in mathematics."

"Mr. Simons concluded that financial prices featured defined patterns, much as the apparent randomness of weather patterns can mask identifiable trends."

"Mr. Simons convinced a reserved Stony Brook mathematician named Lenny Baum, whose work helped pave the way for weather prediction, speech-recognition systems and Google’s search engine, to join the firm."

"they gathered data going back to the 1700s—ancient stuff that almost no one cared about but Mr. Simons.

“There’s a pattern here; there has to be a pattern,” he insisted."

"Mr. Simons hired a Parisian to read an obscure French financial newsletter and translate it before others had a chance to act. He consulted an economist named Alan Greenspan who later would become Federal Reserve chair. Mr. Simons set up a red phone that rang whenever urgent financial news broke, so he could be the first to trade."

"Relying on intellect and instinct didn’t seem to work. Mr. Simons refocused on building a computer trading system reliant on mathematical models and algorithms, an approach that might allow him to avoid the emotional ups and downs of traditional investing."

"This effort was led by another acclaimed former Stony Brook mathematician, James Ax. The firm’s data trove was riddled with faulty prices, however. They found another former professor named Sandor Straus to scour the data and ensure it was ‘clean,’"

"The doubts piled up in the 1980s. By the end of the decade Mr. Simons was on his second marriage and third business partner. Returns at his Medallion hedge fund were so awful he halted its trading and Mr. Ax quit"

"A new team that included Elwyn Berlekamp, a computer scientist who taught part-time at the University of California, Berkeley, began identifying reliable and repeatable short-term patterns in the market. They shifted to concentrate on this kind of trading, holding positions for just a few days. The idea was to resemble a gambling casino, handling so many daily bets they’d only need to profit from a bit more than half of their wagers.

Another mathematician Mr. Simons had recruited from Stony Brook, Henry Laufer, made important discoveries demonstrating the market’s recurring and overlooked trading sequences. Monday’s price action often followed Friday’s, while Tuesday saw reversions to earlier trends. Medallion began buying late in the day on a Friday if a clear uptrend existed, and sold early Monday, taking advantage of what they called the “weekend effect.”"

"Implementing their new short-term, computer-driven approach, Mr. Simons’s team saw big gains. Outsiders scoffed."

"Then, Medallion scored a gain of 55.9% in 1990, a dramatic improvement on its 4% loss the previous year. The profits were over and above Medallion’s hefty fees—5% of all assets managed and 20 percent of all gains."

Who knew life was this easy?

When I click on my browser's icon, the home page sometimes shows articles "Recommended by Pocket." The titles and descriptions of these articles make it seem so easy to solve hard problems. They seem to good to be true. If they were true, it seems like people would all be deliriously happy.

Here is a sample:


"This Ancient Habit Will Maximize Your Focus"
    -Our thoughts are often so cluttered by worry and fear that we lose focus, having  a mantra can help you get it back.


"This is How to Actually Work Smarter, Not Harder"
    -Eight unexpected (and counterintuitive)  ways to squeeze more out of your workday.


"3 Ridiculously Simple Steps to Boost Your Team's Productivity
    -Get actionable tips and tricks to ease the work challenges your team faces every day.


"How to Pick the Right Dog"
    -Beyond just the breed, this is about the individual.


"How to Have Difficult Conversations When You Don’t Like Conflict"
    -An executive leadership coach shares some tips on how to approach potential conflicts


"What to Do When You Feel Like You Don’t Fit In at Work"
    -Culture fit isn’t just a fluffy goal. Having friends at work is important for your productivity and happiness.



"How to Be More Productive Without Putting in Extra Hours"
    -Small changes. Big results.


"The Emotionally Intelligent Way to Resolve Disagreements Faster"
    -Unpacking the counterintuitive psychology behind conflict resolution.


"How to Stay Informed Without Losing Your Mind"
     -Online news can feel like an ocean of information. Here’s how to navigate your way through.


"The Real Trick to Staying Young Forever"
    -As more people live longer, the case for intergenerational relationships is getting stronger


"What To Do When You’re Feeling Lost"
    -It may seem daunting, but a period of  disorder from time to time can be a beneficial break from stress.


"When You Don’t Know What to Do, Make Tea"
    -Don’t worry, the answers will come to you.