The rate of unemployment has an effect on various other aspects of the economy including the gross domestic product, inflation, and the financial markets. The Bureau of Labor Statistics calculates the rate of unemployment as the number of people unemployed divided by the number of people in the job market. This does not signify that everyone who does not have a job is considered unemployed.
This unemployment number includes only people who have been actively searching for a job for the last four weeks, as well as those who have been temporarily laid off.
In a June 2, 2006 article entitled U.S. Economy Loses Steam it is reported that “the nation’s unemployment rate dipped to 4.6%, the lowest in nearly 5 years” (Associated Press).
Although this may sound like good news and suggest that since the rate of unemployment has been decreasing, the economy is booming, this is not necessarily true.
The overall rate of unemployment may be lower than it has been in the previous 5 years, however in May, the number of new jobs added were not impressive. “Cautious employers added just 75,000 new jobs in May, the fewest in seven months, in a fresh sign that the national economy is losing momentum heading into the summer” (Associated Press).
Though low unemployment rates generally signifies a strong economy, when we factor in that the number of new jobs being created in the last few months has slumped, his is an alert that the economy may be headed in a negative direction.
The count for new jobs generated last month was the smallest since October, when hiring practically stalled as the fallout from the Gulf Coast hurricanes jolted companies. It fell short of the 170,000 new jobs economists had predicted. Manufacturers, retailers, home builders, trucking firms, hotels and motels were among those shedding jobs last month….Job growth, which has been steadily weakening since February, was lower in March and April than previously reported. Employers added 175,000 jobs in March and another 126,000 in April – 37,000 fewer positions for both months combined than estimated a month ago (Aversa).
The lackluster outlook for many of the financial markets are one factor which is leading to the slowing down of gains in employment.
Rising energy prices, higher borrowing costs and a cooling of the once red-hot housing market are the main forces shaping the slowdown in the country’s overall economic activity. Those factors, along with sagging consumer confidence, are making companies extra careful not to bulk up their payrolls in case the economy takes an unexpected turn for the worse, analysts said.
The facts that the decrease in the improvements in the unemployment rate may not continue could have a direct on financial markets. When employers are reluctant to hire new workers, worried that the economy may be headed for a down turn, employees’ wages do not increase at a rate that keeps it aligned with market prices and gives families the same value for their dollar as it had a month or two earlier. Jeannine Aversa reports in Job Growth Slows; Unemployment Rate Drops that “workers’ average hourly earnings edged up by just 0.1% in May from the previous month to $16.62. Over the last 12 months, wages rose 3.7%, meaning paychecks are probably trailing inflation, said Lynn Reaser, chief economist at Bank of America’s Investment Strategies Group.” It can be assumed that this will lead to decreased spending by consumers.
The fact that wage rate increase is not staying up with the level of inflation along with the slow down in new jobs may have an additional effect on the lack of consumer spending and sluggish markets when it is coupled with the increasing price of gasoline. “Oil price, which hit a record high of more than $75 a barrel in late April, are now hovering above $71 a barrel. Gasoline prices have topped $3 a gallon in some areas” (Aversa).
The rate of unemployment also has a substantial relationship with the gross domestic product. Because people are anticipated to spend less money on goods in the near future, businesses will start to produce less goods to keep supply in line with the sagging demand. When business output remains stagnant or decreases, the need for additional workers also decreases. Therefore, if consumers move into more of a saving mode than a spending mode as anticipated, the rate of unemployment will not improve and could even begin to increase as the need for new workers is directly dependent on the rate of production needed to satisfy demand in the product market.
A stagnant unemployment rate and the small gains in the wage rate, however, generally have a positive effect on inflation. Because wage rates are not increasing and companies are not hiring more workers, companies do not have to pass the increased cost of labor off to the consumer by raising prices for commonly purchased goods. Therefore, if the rate of unemployment does increase, this should not trigger the inflation rate to increase. However, the fact that oil prices have been increasing dramatically may have an effect on this trend as these high oil prices may now need to be passed off onto the consumer which may lead to inflation. To ward off inflation the Federal Reserve may manipulate interest rates. “The Fed is in a tricky spot. It wants to make sure energy prices don’t spark broad inflation and it also doesn’t want its rate increases to crimp economic activity too much” (Associated Press).
In conclusion the rate of unemployment is at a low point calculated this month at 4.6%; however, because the number of new jobs being created has been slowing down recently, this number may not reflect as positively on the economy as one would think. Due to increased oil prices, inflation may soon be on the rise and consumer’s wage rates are not keeping up with that pace. This may led to less consumer spending causing the demand on the product market to decrease and the gross domestic product to decrease with it. This will in turn affect the demand for new workers in the labor market which can negatively affect unemployment rates.
Associated Press. U.S. Economy Loses Steam. CBS NEWS.com. June 2, 2006. http://www.cbsnews.com/stories/2006/05/05/business/main1591439.shtml
Aversa, Jeannine. Job Growth Slows; Unemployment Rate Drops. Forbes.com. June 2, http://www.forbes.com/feeds/ap/2006/06/02/ap2790533.html