Business leaders are afraid of low unemployment rates, and they shudder with fear, if somebody would say, - which is absolutely unlikely at the moment, - that full employment is near. Full employment is something which a mathematician would equal to a 0% unemployment rate, but the majority of economists have a different way to see it: Even in full employment the unemployment rate is greater than zero percent.
Milton Friedman, who received the Nobel prize in 1976, said in his Nobel memorial lecture with the title "inflation and unemployment": Professional analysis of the relation between inflation and unemployment has gone through two stages since the end of World War II and is now entering a third. The first stage was the acceptance of a hypothesis associated with the name of A. W. Phillips that there is a stable negative relation between the level of unemployment and the rate of change of wages - high levels of unemployment being accompanied by falling wages, low levels of unemployment by rising wages. The wage change in turn was linked to price change by allowing for the secular increase in productivity and treating the excess of price over wage cost as given by a roughly constant mark-up factor.
He is also the one who coined in his theory the expression "natural rate of unemployment". NAIRU (Non-Accelerating Inflation Rate of Unemployment) is a threshold value below which inflation begins to rise.
From this theory and from experience we can derive easily that most employers will be interested in a high unemployment rate. It will ensure low wages and additionally he/she will have a huge auxiliary army to recruit new workers if necessary.
The majority of people finds a high unemployment rate repulsive and this majority of people is the one who are electing the politicians. Remembering Ameringers saying: "Politics is the gentle art of getting votes from the poor and campaign funds from the rich by promising to protect each from the other." we can understand the rulers dilemma.
The managers expect them to keep unemployment as high as possible, while the voters want it as far down as possible. The politicians solve this dilemma by continually manipulating the data from the unemployment statistics. They are very inventive in changing the underlying conditions.
The continually redefine the rules which define who is unemployed, e.g.
- somebody younger than .... or older than .... is not counted as unemployed.
- somebody without work but married to somebody having a job is not counted as unemployed
- somebody who is without work for more than ..... years is not unemployed, because - view of politicians - he doesn't want or can't work anymore.
- if somebody is temporarily sick, while having the status of being unemployed he is not considered to be unemployed while being sick
The problem is, that you can't compare anymore unemployment rates from different periods of times, because the foundations, i.e. the definitions, had not been the same.