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A Phone Call From Adam Smith

Oct 14, 2010 • 192 Views

The phone rings. The caller says he is Adam Smith and you have won the Nobel Prize in Economics. Your response?

As you know, the 18th century author of The Wealth of Nations, Adam Smith, is perhaps the greatest economic thinker. Seemingly chaotic, the market seemed more orderly after Smith told us about the role of the invisible hand.

The person who calls the winners, Smith’s namesake, is the editor-in-chief at nobelprize.org. As he introduced himself, I wonder what he said to the economists.

This year, the work of the three economics winners was especially relevant. Focusing on labor markets, their research sought to explore why laborers remain unemployed even when jobs are available. As expressed on the Nobel website, “…although the perfect employee or buyer may be out there somewhere, the job and property markets unfortunately do not work with such efficiency that you can locate them immediately, or indeed at all.”

I wonder whether the slow match time between jobs and employees is happening in San Francisco. According to a recent WSJ article, San Francisco is experiencing a “boomlet” in web and digital media companies. And yet, during August, their unemployment rate was 9.7%.

The Economic Lesson

To calculate the unemployment rate, you need to know the size of the labor force and the number of people who are 16 years old, a part of the labor force, and looking for jobs. Currently there are approximately 155 million people in the labor force which includes anyone who is 16 or older and employed or looking for a job. 14.8 million of those individuals are unemployed. Dividing 14.8 million by 155 million, you get a 9.6% unemployment rate.

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