Question

Firms adjust employment less than one for one in response to deviations of output growth from normal. More specifically, output growth 1% above normal for one year leads to only a 0.6% increase in the employment rate. At the same time, an increase in the employment rate does not lead to a one-for-one decrease in the unemployment rate. Why? Explain your reasoning in a concise manner.

Answer 1

There are two main reasons for this First is capital intensive production and Second is growing labor force.

Capital intensive production: When the output in the economy is mainly capital intensive it uses less labor and more capital for production. Because of it as the production increases (most probably because the production is done by machine) or the output grows fewer people get employed. To rectify this situation the economy need more labor intensive work.

Increasing labor force: More people are getting eligible for work than the number of people getting employment. For example every year 500 people are getting jobs but 600 more are getting in the line for new jobs. This will increase the employment rate but will not decrease the unemployment rate much.