Question

Is there any conceptual connection between the unemployment rate and capacity utilization? How are they similar?

Answer 1

The employment rate and capacity utilization tend to move together along the business cycle. But after two recent recessions, they have diverged from each other. The unemployment rate and capacity utilization are inversely related. Along the upswing movement on the business cycle, Increase in capacity utilization of resources leads to decrease in unemployment.

But from 1990s economic crisis and 2000 dot-com bubble, jobless recovery has stated. There is an increase in capacity utilization without the decrease in unemployment. The reason is -

1. Employers want to be sure of strong recovery before hiring.
2. Employers buy machinery instead of labor and thus unemployment remains as it is.
3. Employees may have switch ot other industries and took time to be employed again.