Home > B1 > Decrease in Unemployment Rate: True or False?

Decrease in Unemployment Rate: True or False?

https://i2.wp.com/www.americanprogress.org/wp-content/uploads/cartoons/2009/03/img/031709.jpg

Source: American Progess

As the rate of unemployment has been dropping in 2013, we see this as a lagging indicator that more jobs are becoming available. The unemployment rate hit a peak in 2010 with a high of 10%. Ever since it has been steadily decreasing and most recently reported to be 7.5% as of April 2013 (Bureau of Labor). One of the largest gain in jobs occurred in Texas at 33,100 and the second largest in New York at 25,300 jobs gained. (Bureau of Labor).  As we near the end of the month of May, we see that an unemployment rate has not yet been determined for this month showing that it is a lagging indicator for how our economy is doing. The decreasing unemployment rate renders hope for our economy. This is due to the fact that there are more jobs available because more production of products is being called for as a result of consumers spending more money and demanding more products. More production to meet consumer’s demand simply cannot be accomplished by a minimal amount of laborers therefore more jobs become available thus lowering the unemployment rate.

As this rate continues on a downward trend, we see consumers spending more and more money to grow the GDP (gross domestic product). Also, as more and more people are obtaining jobs, more and more people have more money to spend which will also grow the GDP. Because consumer spending makes up approximately two-thirds of the GDP, putting more money in the pocket of consumers encourages them to spend more and increase the GDP. This is necessary in order to grow our economy because GDP is based on consumer spending, investments by businesses, government spending, net exports. America’s net exports are a negative number because we import more than we export and that lowers the GDP.

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Source: Bureau of Labor Statistics

Although having more money in the pockets of consumers for them to spend is an ideal way to increase GDP because it makes up such a large portion of it, that is not always what happens when people have more money than before. The paradox of the Thrift suggests that as consumers obtain more disposable income, they will save more of it to protect their self-interest which in turn hurts the macro-economy. This idea lead to Keyne’s solution to increase government spending in order to make the depth of the trough smaller. This solution suggests that government spending is the way to fix the problem. At the end of 2012, however, both solutions were put into question and taxes were raised, lowering the amount of disposable income consumers have to spend to grow GDP and by March government spending was cut which slows the growth of  GDP as well.

It turns out that the decrease in the unemployment rate is due to the fact that there are half a million fewer people in the labor force now (Money CNN).  What seemed like good news for the economy at the time the new unemployment rate was calculated is really just a decrease in people who are in the work force. The unemployment rate dropped for the wrong reasons meaning that there has not been a significant increase in consumer spending therefore no significant increase in GDP.

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