Question

Usually the unemployment rate , U3, as measured by the Bureau of Labor Statistics (BLS) decreases in the expansionary phase of the business cycle and increases during a downturn in the economy. However there are times when the unemployment rate increases when the economy begins to recover from a deep and prolonged recession. Use the BLS methodology to explain the paradox of an increase in the unemployment rate despite the improving economic conditions as the country recovers from a recession.

Answer 1

Phillips curve states that there is an inverse relationship between inflation and unemployment in any economy that is the uneployement rate decreases during the expansionary phase of the cycle and increase when there is a slowdown in the economy.

When an economy starts its recovery after a prolonged recession, there always need some technological intervention to bring the growth rate back to its normal. In such disruption, there are requirements of new skills and people with the undesirable set of skills loses their employment. Which indeed causes the surge in the umemployment rate. Though the Wages of the people increases at a considerable rate the no. of employed people declines.

This leads to an unique situation which normalises after the reskilling of the workforce.