While everyone is raving about how well the economy is doing, in terms of job growth and lower unemployment numbers, I was wondering about the outcome of such a state… When the unemployment numbers are low, it is obvious that the salary should rise since the demand for an employee grows. If salaries were to raise, then the company is forced to either increase the price of the product or increase the productivity of the employees. In a perfect competition, prices have high sensitivity. So, the only way for a company to increase productivity is by firing employees. When enough companies start firing employees, the demand for an employee will go down and the system will achieve stability… The above situation also explains why inflation is high these days. When job market is strong, the buying power is strong which explains why inflation is high. This is one of the reasons why housing market didnt go down as much as it was thought to be. Also, this is why Fed is very careful with the interest rates. If they increase it, there might be a huge surge of unemployment. At the same time, if they reduce the interest rates, it will further the inflation…. So, a good economy need not necessarily be good for the masses….
Effects of a good economy…a thought process…