Employment level is one of the good ways to judge the health of the overall economy. When the Great Recession hit in 2008, the economy crashed and unemployment grew to 10.0%. Since then, America has been working hard to get the economy thriving again. The June jobs report shows the unemployment rate at 5.3%, the lowest in 7 years. Economist monitor changes in the unemployment (UE) rate carefully, ensuring a growth in jobs and a decrease/stable rate of UE.
Unemployment refers to the people who are currently looking for a job and are of working age, not a student, and are not currently employed. A similar word is underemployed. This refers to people working part time, who want to work full time, or working at a job that does not fully utilize their skills or education. The underemployed do not count as unemployed, but both situations mean that an economy is not using their human resources to the fullest.
The people who lost their jobs during the recession are included in the category of cyclical UE, which is caused by low or falling aggregate demand, ie during a recessionary gap. Ways to fix cyclical UE include monetary policies. Monetary policies are carried out by the central bank of each country. As seen in the diagram below, initially the economy is producing output Yrec when in a recessionary gap. The government works hard to shift AD1 to AD2 with intention to increase Gross Domestic Product Yp representing potential output. The recessionary gap shrinks as AD shifts right, eliminating cyclical UE when it reaches Yp. In theory, the economy thrives to be at AD2 ; however, it is an unreachable feat because there will always be cyclical UE.
Correcting cyclical UE with monetary policies has its strengths and weaknesses. The benefits of these policies include no crowding out and the central bank has independence and no political constraints. Along with this, the interest rates are easily adjusted to fit the UE. On the contrary, monetary policies include long time lags, possible ineffectiveness in a deep recession, and possible conflicts with the government.
The article mentions the Federal reserve and their pending decision on whether or not to increase or decrease interest rates. Ideally, we want low interest rates and low unemployment; however, according to the Phillips curve, that is impossible. The Phillips curve shows a constant negative relationship between interest rates and unemployment. In the diagram shown below, rate of inflation is along the y- axis and UE rate is along the x-axis. Point d shows us that to have low unemployment means that we will have high rate of inflation. To correct that inflation, the Federal reserve will increase interest rates. But when unemployment is high, point a, the rate of inflation fall while interest rates will also decrease. A better look into the June jobs report shows an interesting fact about the change in the labor force. The equation for calculating the UE rate is # of UE / labor force. The labor force is the total number of employed and unemployed workers. Once an UE worker stops searching for work, they become discouraged and leave the labor force. The 7 year low UE rate could possibly be a result of a 0.3 percentage point decrease seen in the labor force in June. The low UE rate in June is due to a smaller number of people actively searching for work; which is an indicator that people have lost incentive to search for jobs because they are not finding any work.
In the real world, economists have a hard time measuring unemployment accurately due to hidden employment. The UE rate does not distinguish between part time and full time workers and the underemployed. It also does not take the underground economy into consideration either, such as activity not reported to tax authorities.
If unemployment and a shrinking labor force continue, it will have serious economic consequences. Government will be giving out a lot of welfare to unemployed people, thus losing money. Along with that, the government will be losing tax revenue from these unemployed people.
The United States continues to work towards a stable economy everyday. The low UE rate seen in June is promising; however, it is paramount that the government continues to work towards full employment.