Question

Explain how the official BLS unemployment rate can increase even if the economy generates net positive jobs in the month? a. What may likely to happen to unemployment rate if CPI continues to pick up? Please, short and precise answer. Thank you!

Answer 1

Unemployment rate is the percentage of labor force that is not employed. Unemployment rate can increase even when net positive jobs are created. This happens when labour force increases more due to migration into the country, new jobs do not provide adequate salary to attract labour or jobs created do not match with the skills of majority of labor force.

Picking up of CPI implies increase in price level, i.e. inflation. According to Philips curve there is a negative relationship between inflation and unemployment in short run. As inflation rises unemployment falls because producers are getting higher prices.

But in the long run labour will expect the prices to be higher and hence they demand increase in wage rate. Unemployment rate does not it remains at the initial level.

Thus in long run nothing happens to unemployment rate when CPI continues to rise but decrease in short run.