Economics: A Contemporary Introduction 9th Edition by William McEachern

Exercise 3

Case Study: Hiring Picks Up, But Jobless Rate Rises Imagine that during an expansion the U.S. economy adds 300,000 jobs. In addition, because of the improving economic conditions, the labor force increases by 200,000. Would the unemployment rate go up or down?
Reference Case Study:
Public Policy
"Hiring Picks Up, But Jobless Rate Rises" So reads the headline describing the April 2010 jobs report. In a burst of hiring, the U.S. economy added 290,000 jobs, for what was then the biggest monthly gain in four years. That sure sounds like good news-until you learn that the U.S. unemployment rate climbed too, from 9.7 percent to 9.9 percent. How could that rate rise when the economy was adding so many jobs?
Because of a severe recession, the number of unemployed increased by over 8 million between early 2008 and early 2010. But even that total understates the number who wanted jobs. Recall that to be counted as unemployed, those wanting work must have looked for a job in the prior four weeks. With 8 million people looking for work, and with firms more likely to be firing than hiring, the chances of finding a job diminished. In frustration, some gave up their search, and these people are called discouraged workers, a term already introduced. But the U.S. Labor Department identifies a second group of people who wanted a job but did not look for work in the prior four weeks. This group faced transportation problems, family problems, or some other snag that kept them from looking. It wasn't that they were frustrated with their search, they just got sidetracked with some personal issues. Discouraged workers and this group that got sidetracked are considered marginally attached to the labor force.
At the beginning of 2010, an estimated 2.4 million people were marginally attached to the labor force. This was 1.1 million more than before the recession began. Thus, when the economy started showing signs of life, as it did in early 2010, some people who had been sidelined for one reason or another took notice and decided to look for work, thus joining or rejoining the labor force. In April 2010 the labor force increased by about 800,000 people from the month earlier. Most of those people didn't find jobs right away, so they swelled the ranks of the unemployed. Even though the economy created 290,000 jobs during the month, that was not enough to offset the spike in the labor force. Thus, we get the seeming paradox of healthy job growth but a rising unemployment rate.
The same happened during the recession of 2001; the unemployment rate did not start to decline until two years after the recession ended. That's why the unemployment rate is often considered a lagging indicator of economic activity. Even after the economy starts to recover from a recession, the unemployment rate continues to increase for reasons that are not all bad. Those who want a job are encouraged enough by the uptick in jobs to look for one.