Are Unions Good For The Economy

Published Date: 02 Nov 2017

They are good for America's economy, just not good for the economy of big businesses. The main thing that a union does is establish a set of rules that regulate the employment of all of its members.  The unions take the collective bargaining rights of their members and negotiate wages, benefits and create a hierarchy of how employees interact with the company or government entity that they work for. The biggest advantage of a union is that they bargain for much higher wages than non-union workers.  So, what impact does this have on the economy?  First of all, higher wages go to the workers.  These wages are then spent throughout the economy.  That means that higher wages for union workers can lead to more spending and a more robust economy.  Of course this is only part of the picture, but from what I can see it is the only thing that a union does to help the economy. 

For starters, the typical union has so many rules in place that control how employees are promoted.  As far as what I’ve seen and read about, almost all unions are based on seniority.  That means that if an employee has more tenure, that they get paid more than others.  To me, this is one of the union’s biggest disadvantages.  That’s because this methodology basically promotes complacency.  After all, why would someone want to work harder if they aren’t going to be rewarded for it?  Also, it’s hard for a company to be productive if the most productive people aren’t getting promoted.  After all, not all workers are equal, and they shouldn’t be treated as if their skills were all the same.  If an employee is better equipped to take on responsibility, and they add more value to the overall company, shouldn’t they be promoted ahead of someone that is complacent and not nearly as productive, just because that person was hired first?

Another disadvantage of unions is actually the same as the advantage – the much higher pay.  While being paid more is good for the employee in a fiscal sense.  The fact that the same amount of money they are getting paid can pay for 1.5 non-union employees; it stands to reason that a company that utilizes union labor cannot afford to hire as many workers.  What does this mean to the economy?  It means that a non-union company has a huge advantage over a union company, in terms of cost and perhaps productivity (see above).  While you can argue either side of this, the global economy doesn’t really care where things are built anymore.  That means that new contracts typically go to lower cost companies.

Is unemployment long for short term? Neither... because it really depends on how we look at the data. Most spells of unemployment are short. Yet most weeks of unemployment are attributable to the small number of long term unemployed. Unemployment can be short term, where the workers need some times to search for a job that suits him/her better, as for long term cannot easily attributed to the time it takes to match jobs and workers: we can expect his matching process to take many months.

2) How does the FOMC change the money supply? What are some of the problems in controlling the money supply? Are we facing any today? Explain fractional reserve banking. 

Formulating a country's monetary policy is extremely important when it comes to promoting sustainable economic growth. More specifically, monetary policy focuses on how a country determines the size and rate of growth of its money supply in order to control inflation within the country.

In the United States, a committee within the Federal Reserve is responsible for implementing monetary policy. The Federal Open Market Committee (FOMC) is comprised of the Board of Governors and five reserve-bank presidents, and it meets eight times throughout the year to set key interest rates and to determine whether to increase or decrease the money supply within the economy.

The FOMC buys and sells government securities to set the money supply. This process is called open market operations. The government securities that are used in open market operations are Treasury bills, bonds and notes. If the FOMC wants to increase the money supply in the economy it will buy securities. Conversely, if the FOMC wants to decrease the money supply, it will sell securities.

To increase the money supply in the market, the FOMC will purchase securities from banks. The fund that the banks acquire from the sale can be used as loans to individuals and businesses. The more money that is available in the market for lending, the lower the rates on these loans become, which causes more borrowers to access cheaper capital. This easier access to capital leads to greater investment and will often stimulate the overall economy.

To decrease the money supply, the FOMC will sell securities to banks, which leads to money being taken out of the banks and kept in FOMC reserves. The decrease in money available in the economy leads to a decrease in investment and spending as the availability of capital decreases and it becomes more expensive to obtain. This limiting of access to capital slows down economic growth as investment decreases.

The first problem is that the Fed does not control the amount of money that households choose to hold as deposits in banks. The more money household’s deposit, the more reserves banks have, and the more money the banking system can create. And the less money household’s deposit, the less reserves banks have, and the less money the banking system can create. To see why this is a problem, suppose that one day people begin to lose confidence in the banking system and, therefore, decide to withdraw deposits and hold more currency. When this happens, the banking system loses reserves and creates less money. The money supply falls, even without any Fed action.

The second problem of monetary control is that the Fed does not control the amount that bankers choose to lend. When money is deposited in a bank, it creates more money only when the bank loans it out. Because banks can choose to hold excess reserves instead, the Fed cannot be sure how much money the banking system will create. For instance, suppose that one day bankers become more cautious about economic conditions and decide to make fewer loans and hold greater reserves. In this case, the banking system creates less money than it otherwise would. Because of the bankers’ decision, the money supply falls.

Summary: The Fed controls the money supply primarily through open-market operations: The purchase of government bonds increases the money supply, and the sale of government bonds decreases the money supply. The Fed can also expand the money supply by lowering reserve requirements or decreasing the discount rate, and it can contract the money supply by raising reserve requirements or increasing the discount rate.

A banking system in which only a fraction of bank deposits are backed by actual cash-on-hand and are available for withdrawal. This is done to expand the economy by freeing up capital that can be loaned out to other parties. Most countries operate under this type of system. Many U.S. banks were forced to shut down during the Great Depression because so many people attempted to withdraw assets at the same time. Today there are many safeguards in place to prevent such an instance from occurring again, but the fractional-reserve banking system remains in place.

3) What is a healthy growth rate? What generates a growth in the economy? Are there any past examples? How does inflation affect growth? What is the catalysis for the US economy in the next decade?

The economic growth rate provides insight into the general direction and magnitude of growth for the overall economy. In the United States, for example, the long-term economic growth rate is around 2-5%, this lower rate is seen in most highly industrialized countries. Fast-growing economies, on the other hand, see rates as high as 10% although this rate of growth is not likely to be sustainable over the long term.

Education Raises Living Standards

Educated people not only produce more as workers - and hence get paid higher salaries - but, more importantly, they produce innovative new technologies. Sustained economic growth and higher living standards are only possible if you educate your citizens well. There are, of course, other good reasons for getting an education, including the ability to appreciate fine art and literature. But if all you care about is living in a country that has rising living standards, you should work hard to promote education in the sciences and the engineering, sectors where revolutionary technologies are created. (Notice that I'm not saying that lots of people should become economists. There's scant evidence that economists can do much more for growth than urge others to become engineers!)

Economic Growth Depends on Innovation

Technological innovation that is. At any given moment, there is a fixed amount of wealth that could be divided equally among all people, like slicing a pie into equal pieces and giving each person one equal slice. But if living standards are to keep rising, you need a bigger pie to split up. In the short run, you can get a bigger pie by working harder or using up resources faster. But the only way to have sustained growth is to invent more efficient technologies that allow people to produce ever more from the limited supply of labor and physical resources.

What $5 bought you a few years ago now will cost you $10 to buy the same item today. Think about how that affects business who need to buy inputs -- say steel, iron, bushels of food, etc. An increase in the general level of prices implies a decrease in the purchasing power of the currency. That is, when the general level of prices rises, each monetary unit buys fewer goods and services. The effect of inflation is not distributed evenly in the economy, and as a consequence there are hidden costs to some and benefits to others from this decrease in the purchasing power of money. For example, with inflation, lenders or depositors who are paid a fixed rate of interest on loans or deposits will lose purchasing power from their interest earnings, while their borrowers benefit. Individuals or institutions with cash assets will experience a decline in the purchasing power of their holdings. Increases in payments to workers and pensioners often lag behind inflation, especially for those with fixed payments

4) Do we have a lot of debt in historic terms? Please look at pg 407 to help answer? Is deleveraging a problem? How does a negative savings rate affect the economy? Is government spending necessary for growth? Explain.