Unemployment and Inflation
Each month, usually on the first Friday of the month, the Bureau of Labor Statistics
releases the Employment Situation Summary for the previous month. Go to www.bls.gov
and find the latest report. (On the Bureau of Labor Statistics home page, on the left side
of the page, find “Unemployment” and select “National Unemployment Rate.” You will
find the Employment Situation under “News Releases.”) How does the unemployment
rate compare to the rate one month earlier? How does the unemployment rate compare
to the rate one year earlier?
Answers will vary with the latest data. For March 2008, the unemployment rate was
5.1%, up 0.3% from February 2008, when it was 4.8%. Since March 2007, the unem-
ployment rate has increased by 0.7%.
In general, how do changes in the unemployment rate vary with changes in real GDP?
After several quarters of a severe recession, explain why we might observe a decrease
in the official unemployment rate. Could we see an increase in the official unemploy-
ment rate after several quarters of a strong expansion?
In general, the change in the unemployment rate varies inversely with the rate of
growth in real GDP: when the economy is growing, we expect the unemployment rate
to be falling rapidly. However, after several quarters of a severe recession, unemployed
workers may become discouraged and stop looking for work. Since the definition of
unemployed persons requires that they be looking for work, unemployment falls as
workers become discouraged and stop looking. We could see an increase in the official
unemployment rate after several quarters of a strong expansion as existing workers,
encouraged by an increase in wages to attract new workers, leave existing jobs to
search for new ones and discouraged workers begin to search for jobs again.
In each of the following situations, what type of unemployment is Melanie facing?
After completing a complex programming project, Melanie is laid off. Her
prospects for a new job requiring similar skills are good, and she has signed up with
a programmer placement service. She has passed up offers for low-paying jobs.
When Melanie and her co-workers refused to accept pay cuts, her employer out-
sourced their programming tasks to workers in another country. This phenomenon
is occurring throughout the programming industry.
Due to the current slump in investment spending, Melanie has been laid off from
her programming job. Her employer promises to rehire her when business picks up.
Melanie is frictionally unemployed because she is refusing offers for low-paying
jobs in favor of engaging in job search for a higher-paying job.
Melanie is structurally unemployed because she is demanding a higher wage than
the current equilibrium wage in her industry. In this case, the equilibrium wage has
been lowered by the outsourcing of work to other countries.