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Many economists believe that helping everyone get jobs can be dangerous. They think, if too many Americans get lobs, it could cause severe inflation. The price of everything would go up, perhaps to dangerously high levels.
Historically, raising interest rates has been an effective way to reduce or stop inflation. But the problem is that doing this also, inevitably, prevents the unemployment rate from going lower. And if interest rates are pushed too high, the unemployment rate can even go up.
As a result, some people are condemned to more or less permanent unemployment. And, as usual, it is People of Color get hit the hardest.
Here is how it works.
The Governors of the US Federal Reserve Bank have the power to raise or lower interest rates in the US. And, for a long time, they have suggested that if the unemployment rate got down to five percent or lower, they would raise interest rates to prevent undue inflation. And guess what. The national unemployment rate sits right at five percent. Raising interest rates could keep the unemployment rate from going lower. If they raise the interest too high, it could put more people out of work.
How are interest rates connected to inflation?
The more people who are employed, the more people there are who can afford to buy things. If more people have money to spend then they will be trying to buy a limited number of products (cell phones for example). That lets sellers feel free to raise their prices. With all those buyers, some people will be willing to pay the higher price. And if there really are more people willing to buy a product than there are products to sell, the upward pressure on prices can get intense.
If interest rates go higher, businesses find it harder to borrow the money they need to grow their businesses and hire more workers. If the interest rates go too high, employers may even have to lay off workers. Fewer people working means fewer people able to buy things. And that, in turn, means sellers must not raise there prices for fear of not being able to sell all their products to the few people willing and able to buy them.
Shopping in the holiday season provides a perfect example of this. Retailers seriously scrutinize how many people bought their products on the day after Thanksgiving. If there were too few people shopping and buying products that day, retailers have sales (meaning lower prices) to increase their sales.
So higher interest rates make it harder for unemployed people to get jobs or even increases the number of unemployed people. And the unemployment rate is always higher among People of Color than among White People. For example, the US Department of Labor reports that as of September 30, the unemployment rate for White adults was 4.1%. For Black adults it was 8.6% and for Hispanic adults it was 5.9%.
Things were even worse for 16 to 19 year olds. White youth had an unemployment rate of 14%, Black youth had an unemployment rate of 31.7% and Hispanic youth had an unemployment rate of 20.2%.
So what can be done (instead of raising interest rates) to help the remaining unemployed people find work?
In the 1930s the federal government hired massive numbers of workers and put them to work building bridges and reservoirs. But that would be very expensive now, and if it resulted in more people working and able to spend, the upward pressure on inflation would be a problem.
In the 1970s the state of California gave tax credits to employers for hiring and training unskilled workers. The hope was that employers would keep these workers once they were trained. I know about this program because I worked for the state then, and my job was to sell the program to employers.
But if the state or federal governments tried this again, it would be expensive, and probably some skilled workers would be displaced by the trainees. The would not be happy about that.
I’m out of fresh ideas.
Do you have any suggestions? Is there a way we could get more people working without igniting inflation? If you have an idea, let me know by clicking on the word “Comment” just below the title of this post.