Friday, February 09, 2007

Optimal vs. Natural Vacancy and Unemployment

There is a similarity (as one thinks of self-silimarity and self-similar transformations in non-linear differential equations) between "vacancy rates" as seen in the world of real-estate economics and "unemployment rates" as seen in the world of macroeconomics.

This should become clear when we look at optimal vs. natural vacancy and unemployment rates.

Optimality can be defined once we know what it is we are optimizing.

Naturality (to coin a word) can be defined when we know what vacancy rates or unemployment rates a particular market's transactions dynamics will create given its parameters of routine operations.

In a non-monopolistic real-estate market, optimal vacancy rate is 0. All landlords would like to have all of their units rented throughout the year. If tenant X moves out on January 31, the landlord would like tenant Y to start paying rent on February 1. In a monopolistic or oligopolistic market, say in the market for prime office space in San Francisco, optimal vacancy rate might be non-zero. For the monopolist, what matters is an optimal level of profit, not demand satisfaction. Similarly, optimal levels of unemployment are said to occur when Gross Domestic Product (GDP) of an economy is maximized. Of course, the solution to this optimization exercise depends on how we measure GDP. (The general concept also holds at the level of families as socio-economic units. One family may measure their gross domestic product to include things like childcare and nurturning and another may not. Their "optimal" money-driven employment rates will be different.)

For a given real-estate market, natural vacancy rate occurs in order to support the routine movement and migration of tenants from one site to another. For example, if finding a new property proves slow in a particular real-estate market, that market will have a higher "natural" vacancy rate. Similarly, the natural unemployment rate occurs in order to support the routine movement and migration of workers from one job to the next.

We can also talk about natural vacancy rate of positions within an organization or a company. There are always some number of unfilled positions due to the natural rate at which they are vacated and filled and the time lag involved in filling a position.

I should end this entry by noting that in a real economy, there's usually a relationship between all the various kinds of "vacancy" rates (employment, rental-property, etc.) but that relationship has not been the focus of what I've written here.

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