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Part of Western Governors University

May 28, 2019


Effects of low unemployment rates on businesses.

Group job interview

Currently, the US unemployment rate is at the lowest it’s been since 1969. Sitting at 3.7%, the current rate appears to be a good thing. The rate has been steadily dropping for nearly a decade, which would seem to indicate that the economy is strong and that things are going well in the labor market.

But is it possible for the unemployment rate to be too low? The answer is YES.


Unemployment rate and the labor market.

The unemployment rate in the United States is the percentage of workers who are unemployed, and are actively looking for a job. Unemployment ups and downs are directly connected with business ups and downs. As American products and services decline, businesses need to lay off workers.

Workers who are suddenly out of a job, have less money to spend, which reduces revenue for companies. Reduced revenue causes businesses to cut employees to reduce costs. And the cycle goes downward, causing devastation on the way.

Job interviewer

The unemployment rate is considered a “lagging indicator,” meaning the rate will continue to go down, even after the economy improves. It takes a while to start to fall, and a while to rise back up after economic shifts.

So, how could more people having jobs be a bad thing for the economy? There is a “sweet spot” for financial, economic, and social situations when it comes to unemployment. It’s the right spot for enough competition for jobs, but enough jobs available to allow the unemployed to find a good position.

Productivity and slack.

The labor market eventually reaches a point where every new job that’s added isn’t productive enough to cover its costs. Salary, benefits, and equipment are expenses for each job that’s added to the labor market. When the unemployment rate is low, fewer of the new jobs added are worth the cost of paying the employees. And thus, every job added after that is inefficient. This is often called slack in the labor market.

Ideally, the labor market would have no slack. Experts agree that when the labor market goes below 5%, there begins to be slack. So at the current 3.7%, the labor market is starting to become inefficient.


Wage inflation.

Rising wages are seemingly a good thing, but when the unemployment rate is too low, wage inflation is not good. It comes when there’s an increase demand for labor because of low unemployment. With less people available for work, employers have to increase their wages to find, and keep, employees. This can cause some organizations to settle for less-talented workers, which again reduces the productivity of the company as a whole.

Importance of business management.

With a low unemployment rate, it’s crucial for business management to understand how to properly navigate the labor market. Success in managing a business during difficult times comes when you’re prepared with a business degree and/or years of experience.

Smart business managers are able to read the labor market and understand what kind of talent pool they will be dipping into. They will understand how to focus recruiting efforts, market their organization to attract the right potential employees, and work with HR professionals to set the right wages and benefits.

All of these management techniques and skills can be learned through courses of a business degree. WGU offers business management courses within our degree programs that can help you be prepared for your business future.

Job interview

Retaining employees when jobs are abundant.

While it’s important to know how to find good employees during strained economic times, it’s just as important to know how to keep good employees. Low unemployment rates equal an abundance of jobs, and that means that employees are often thinking the grass is greener at another job. Business managers need to know how to keep employees around with the right tools.


Good leadership promotes workplace growth.

People don’t quit jobs, they quit managers. If your management has strong leadership skills, employees are less likely to continue their job search.

Strong managers understand how to create opportunities for employees to grow and find promotions inside their organization. They work with the whole organization to help everyone feel productive and excited about the future. They find new products or ideas that will make their business grow and flourish, and stand behind the new opportunities.


Job search

Investing in your employees.

Great managers also spend time investing in employees. They mentor employees to help them grow and learn more. Employees crave continued learning, and when managers invest in employees they’re able to continue to grow.

When employees feel like their managers care about them personally and professionally, they are more likely to stick around. That manager-employee relationship is crucial for employees to enjoy their work and want to grow.

As managers prove to employees that they are willing to give time, resources, and responsibility, the employees feel more confident in their opportunities moving forward with the company. They will decide to stay with an organization because they believe in themselves and their potential.


Creating a positive work environment.

When struggling to retain employees, ensure that your HR professionals are providing support to employees. A positive work environment is the most important thing you can do to encourage employees to stick around.

When employees are excited and happy about coming to work, it changes the entire culture of the office. Hard days can be turned around, and stressful situations can be fixed. A positive work environment is where employees and managers all get along, the work is done, and any issues are handled with kindness.

The right degree can help you be prepared to manage a team and help the employees want to stay around even when there are lots of jobs floating around.

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