USChinacall,joblessclaimsandequilibriumwages

The important news which took the limelight yesterday was the phone call between the US President and the Chinese Premier, the first one after the US Presidential election results came out in November. As per the US side, the two-hour phone call touched on multiple topics including the controversial ones. The US President later underlined the need to make the US more competitive while speaking to a group of senators about his call with China warning “If we don’t get moving, they are going to eat our lunch.”

Apart from the phone call, we also saw the release of US jobless claims data yesterday. The initial claims number came at 793 000 which was more than the market expected, highlighting the sway that the pandemic still has in restricting economic activity. Apart from the initial claims which indicate how many people have lost jobs recently and filed the claims for the first time, the total pool of jobless people is also not decreasing in numbers. As per the data, the total jobless claimants across various federal and state relief programs currently stands close to 20 million.     

Yesterday we wrote about the war cry which the Fed chief gave about getting the economy back to the full employment levels. Which means that all these 20 million people needed to be brought back to the employment fold. Now let’s try to see this situation in terms of the classical economic model. A large unemployed force means that the supply of labour is in excess. We know that for any commodity the demand and supply curve meet at a clearing point called the price. If the supply increases, the price moves left. In the context of employment demand and supply, the clearing point is called the wage. In an ideal academic world, the price should move left till the point that the excess supply vanishes and then a new equilibrium emerges. But the world is not either academic nor ideal, a lot of inconsistencies get introduced in terms of minimum wage laws and unemployment benefits. These create impediments in the way of arriving at the equilibrium wage.  

In his book The General theory of employment, interest rate and money, John M Keynes describes this phenomenon in detail. He writes that if we flip the problem and see it from the point of view of an entrepreneur rather than the wage earner, we can realize that minimum wages add to the cost of doing business. The four factors of production viz land, labour, capital and entrepreneurship need to meet in optimal fashion to produce the most efficient output. Minimum wage laws (though morally well justified) hence impede output to reach its full potential. In the current context sometimes when the NFP data shows a rise in wages along with an increase in unemployment, the data points become difficult to reconcile and justify.

In other news the number of new daily cases in the US continue to drop. The equity markets stay elevated on the possibility of the continued drop in cases matching with smooth vaccine rollout to create good economic activity going forward. The Dollar Index trades a bit down at 90.46 and 10-year treasury trades at 1.16. China market is closed on account of new year holidays. Brent crude continues to trade north of 60$/bbl. Locally in India, the currency continues to trade in a narrow range of 72.70 and 73, whereas the forward premium stays elevated. The one year annualized forward premia currently trades at 5.15%. The 10-year benchmark bond trades at 5.97.