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September 26, 2011

How Low Interest Rates Hurt Employment

Historically, as our economy has plunged into a recession, the Federal Reserve lowers interest rates and creates more money in an effort to stimulate the economy.  We’ve already examined how this method can weaken a currency, increase inflation, and hurt growth.  Additionally, Central Banks lower interest rates to promote employment.  Unfortunately, in the current environment, low interest rates can actually hurt employment.

Retirees survive based on income created from savings.  This income can come in several different forms.  Dividend income from stock ownership is used by retirees who have stock options with an organization.  Social Security is another form of fixed income, but is not a solely sustainable form of retirement.  For the most part, retirees survive on the interest created from trust funds, CDs, and/or savings accounts.

When interest rates are low, the amount of income generated from fixed assets falls.  This not only makes it tougher for retirees to live comfortably, but makes it more difficult for current workers of retirement age to retire.  Currently, in the United States there are millions of workers born from 1946 to 1951 (aged 60 to 65) and they have been responsibly saving to retire for their entire careers.
However, as Baby Boomers look at unconfident markets and low interest rates, they become concerned as to whether or not they can afford to retire.  This keeps this group in the workforce longer than they would in a normal economy.  By keeping these jobs filled, it locks out others from either being promoted or being hired.  Either way, this makes it more difficult for the unemployed to find jobs.

If the Baby Boomer generation retires, job openings can lead to a lower unemployment rate and additional economic growth.  Don’t be surprised if unemployment begins to fall if interest rates rise moderately. 

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