In May 2012 the United States added 69,000 jobs. The headline figure everyone looks for is the Unemployment Rate, 8.2%. I think the number of jobs added is the most significant, because you can compare it to the need rather than looking at the number of people looking for work at the unemployment office. For instance the population is increasing at a rate of 260,000 people per month. Since the average family size is 2.6, there is a need for 100,000 family wage jobs monthly to just keep up with the population growth. On the other hand, 300,000 people are retiring every month. All these people have jobs. So really 369,000 new job openings occurred in May. This sounds good, but the reality is over 25,000,000 people are seeking jobs. Shouldn't the United States use the 25 million position job deficit and report how the deficit decreased? Unfortunately, in the month of May it was negative. The number of positions needed increased. The increase of a need for an additional 250,000 jobs states the problem more accurately than the fact the economy created 69,000 new positions.
Most countries calculate the rate of unemployment, but they really want to know the rate of employment. Do they calculate the complement, because it is easier? Well, in fact it is more difficult. The rate of employment can be determined from figures provided by employers, whereas the rate of unemployment depends on each individual person identifying themselves as unemployed. This is a task for the unemployed that is not clear, requires uncompensated effort and is unpleasant to one's ego. Consequently, the figures are derived indirectly through surveys or trend calculations. The result is a mixed figure without much relevance to solving the social problem. It lacks veracity or detail that can direct effective action.
Let's look at one aspect and see whether it would be more helpful if the figure originated from an employment calculation or an unemployment calculation. Let's evaluate why an employee was laid off. Both methods capture the fact the employee was laid off. Countries with unemployment agencies do try to capture why an employee was laid off, but usually to determine whether the employee qualifies for certain unemployment programs. For instance, in the United States certain employees are classified as unemployed due to the competitive forces of international trade. This may qualify them for a special training program. The solution is directed at changing the skill set of the employee.
Whereas, if the country used an employment gathering system employers would report why they are laying off employees. This information could be used by the government to make employers more competitive and enable them to retain employees. This is an employment collection system that allows more effective and focused employment management.
Another advantage of using an employment rate is business and industry can report deteriorating conditions to government officials before the fact. Presumably, this would allow government officials to take action before the situation became critical and irreversible. On the other hand, such a reporting system could also reveal economic bubbles where employment growth was unsustainable like the Housing Bubble in the early part of the this century.
Using an employment rate system allows data to be collected by employer group. On the other hand, unemployment data is collected by individual and is not categorized by employer groups and consequently makes seeing the macro trends more difficult.
This prompts the question: "Why is this backwards system used throughout the world?" It is the way government is organized. Government is a reactive organization. Government is not proactive. Government responds when someone or a group brings a problem before them. Governments are not managers. Governments are judges. Governments do not create processes. They judge guilt or innocence. The result is government is reactive and therefore ineffective in maintaining employment levels or meaningful statistics.
Tuesday, May 29, 2012
Saturday, May 5, 2012
Difference between Supply & Demand and N Theory
Definitions of Economic Theories
Common economic models begin with Supply and Demand Theory. Although there are many other so called theories, the fact is most return to Supply and Demand as the starting point. For instance "Marginalism" is just the last Supply and Demand event. "Budget Constraints" are factors affecting the Supply curve. "Aggregate" theories are simply summary Supply and Demand curves. Then there are the reason consumers select a certain level of Demand. These theories include "Rational Choice," "Utility" and "Opportunity Cost" theories of consumer behavior. Their choice is still made within the confines of the Supply and Demand model. Their choice lacks meaning unless interpreted within the S & D model.
Although N Theory, Negotiation Theory, is based on a repudiation of the Supply and Demand model as the primary economic model the reasons may not be apparent. Let's contrast the two and see if the differences can be made more apparent. First, initial product pricing is set by the Seller in the S & D model. In N Theory no price is set until a transaction is consummated by a Buyer and Seller. So N Theory states "price" is set by a negotiation between a Buyer and Seller. Both participants are given equal weight in the price setting process.
The S & D model states prices changes when the quantity offerred or demanded changes. The N Theory model disregards the "quantity" theory of the S & D model and states prices change when Buyers and Sellers alter their settlement point. N theory states the reson might be the quantity offerred, but it also might be an irrational reason, or an online astrology prediction or the result of an indepth analysis of the market. The reason is not judged as important as the fact the actors changed the direction of the market. In N Theory the movement of the market is the event to be evaluated since it likely foretells future movement.
The S & D model assumes top-down control. The Seller sets the market price and enters or leaves the market to influence the direction of prices. N Theory says future sales are subject to the influence of the millions of consumers and perceptions about the overall economy. N Theory is a bottom-up economic theory. The consumer can influence the Seller to adjust her prices. N Theory is the opposite of S & D Theory.
The way in which S & D and N Theory operate determine the main market factors that influence each theory. For S & D Theory it is the "quantities" of products brought to market. For N Theory it is the perception of the overall economy and the economic position of the Buyers and Sellers in that economy. If a Buyer believes the market for her product will grow, she is unlikely to compromise on price to try to induce a sale, but if the Seller preceives the market is degrading she might make substantial concessions to induce a sale.
This is why S & D Theory based models performed so poorly in the Global Economic Crisis of 2008 and why a consumer based theory like N Theory could foretell an impending economic collapse. Buyers and Sellers are going to begin to change their attitudes before they change their actions. An economic theory that surveys the market actors is much more likely to foresee the direction of the market before the change is reflected in the products brought to market.
Common economic models begin with Supply and Demand Theory. Although there are many other so called theories, the fact is most return to Supply and Demand as the starting point. For instance "Marginalism" is just the last Supply and Demand event. "Budget Constraints" are factors affecting the Supply curve. "Aggregate" theories are simply summary Supply and Demand curves. Then there are the reason consumers select a certain level of Demand. These theories include "Rational Choice," "Utility" and "Opportunity Cost" theories of consumer behavior. Their choice is still made within the confines of the Supply and Demand model. Their choice lacks meaning unless interpreted within the S & D model.
Although N Theory, Negotiation Theory, is based on a repudiation of the Supply and Demand model as the primary economic model the reasons may not be apparent. Let's contrast the two and see if the differences can be made more apparent. First, initial product pricing is set by the Seller in the S & D model. In N Theory no price is set until a transaction is consummated by a Buyer and Seller. So N Theory states "price" is set by a negotiation between a Buyer and Seller. Both participants are given equal weight in the price setting process.
The S & D model states prices changes when the quantity offerred or demanded changes. The N Theory model disregards the "quantity" theory of the S & D model and states prices change when Buyers and Sellers alter their settlement point. N theory states the reson might be the quantity offerred, but it also might be an irrational reason, or an online astrology prediction or the result of an indepth analysis of the market. The reason is not judged as important as the fact the actors changed the direction of the market. In N Theory the movement of the market is the event to be evaluated since it likely foretells future movement.
The S & D model assumes top-down control. The Seller sets the market price and enters or leaves the market to influence the direction of prices. N Theory says future sales are subject to the influence of the millions of consumers and perceptions about the overall economy. N Theory is a bottom-up economic theory. The consumer can influence the Seller to adjust her prices. N Theory is the opposite of S & D Theory.
The way in which S & D and N Theory operate determine the main market factors that influence each theory. For S & D Theory it is the "quantities" of products brought to market. For N Theory it is the perception of the overall economy and the economic position of the Buyers and Sellers in that economy. If a Buyer believes the market for her product will grow, she is unlikely to compromise on price to try to induce a sale, but if the Seller preceives the market is degrading she might make substantial concessions to induce a sale.
This is why S & D Theory based models performed so poorly in the Global Economic Crisis of 2008 and why a consumer based theory like N Theory could foretell an impending economic collapse. Buyers and Sellers are going to begin to change their attitudes before they change their actions. An economic theory that surveys the market actors is much more likely to foresee the direction of the market before the change is reflected in the products brought to market.
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