Economics commentary A2 HL

Title of extract US unemployment rate falls to 10-year low

Source of extract BBC News

URL from which the article came http://www.bbc.com/news/business-39530875

Date of extract 7 April 2017

Word count 749

Date the commentary was written May 2017

Section of syllabus the contrary relates to Section 2, Macroeconomics

Bibliography
Economics Internal Assessment

US unemployment rate falls to 10-year low

This article explains the current state on labour market in the US. Unemployment rate
is number of people of working age who are able to work and who are actively looking for
job, over the total labour force.

Article says: The economy needs to create 75,000 to 100,000 jobs a month to keep
pace with growth in the working-age population. From this part in article we can see that
quantity supplied or in our case the number of the workers is constantly increasing and in
order to meet the supply, US is trying to create the new jobs or the demand for workers. Job
creation requires huge amounts of government spending and investments in a way that firms
will expand. Also we have to make an assumption that this growing working-population will
also increase the consumption and household spending, so demand will increase and firm will
need more workers in order to supply more. Everything under 5% is considered the full
employment; this means that now short run supply of workers has passed the long run supply
which is causing the inflationary gap. To avoid this inflationary gap government should try to
shift the long run supply to the right. This could be done in two ways by improving the
quality or by increasing the quantity. In this case, increase in quantity consider: increase in
birth rate, immigration or decrease in the natural rate of employment. On the other hand
improvement in quality consider: education and training of existing workers.

Anything under 5%1 is considered to indicate "full employment". From this we can
conclude that 5% is the natural unemployment. This information is presented on Figure1,
because Phillips curve cuts the unemployment axes at point of natural unemployment.
Following statement will also present that as unemployment level decrease, inflation rate will
increase. ..but doubted it would stop the US Federal Reserve raising interest rates twice more
this year, with the next move expected in June. From this we can see as the unemployment
rate is decreasing the interest rates is increasing. On Figure 1 for example when
unemployment rate is 3% inflation rate will be 2%, while when unemployment rate is 2%
inflation rate will be 4%. This happens because as we want to decrease the unemployment,
firms will start to increase the wages in order to attract more workers, this directly implies that
cost of production will increase and then price of products will increase as well, which means
that average price level will increase, which is inflation.

1
refers to unemployment rate
Inflation rate (%)

4%

2%

2% 3% 5%
Unemployment rate (%)
Figure 1: Phillips curve

Also following part:The slowdown in payroll growth is exactly what you would
expect when the economy closes in on full employment implies that firms will start to slow
down their hiring. Payroll is the total amount required to pay workers and employees during a
week, month or other period.2 From quote above we can see that there is the slowdown in
payroll growth which means that as rate of unemployment was decreasing the payroll or
wages were increasing, now as the marker reached full employment wages are getting to
increase much slower.

This job creation is constantly increasing the government spending, which means the
huge amount of money is being injected into the system. Situation that they are facing now is
slower increase in the payroll, so businesses are trying to maintain the wage level, but the US
Federal reserve is increasing the interest rates twice more this year. This means that as interest
rates will increase, this will directly affect the consumption which will start to fall. Fall in
consumption will result in a way that firms revenues will decrease so they will have to lay off
workers so unemployment rate will rise. Also by increase in interest rates business will start
to invest less, so investment will fall, as investment fall it will affect the unemployment rate,
because this means that job creation will drop. Inflation will also make US exports less
competitive on the market since they prices will increase. All of the following will not only
cause budget deficit since government is spending so much money on job creation, but as we
can see due to inflation firms will have to lay off current workers because consumption

2
http://www.businessdictionary.com/definition/payroll.html
 dropped. All of this can easily create the crowding out, since it occurs when government run
budget deficits in order to reduce unemployment.

Interest rate Interest rate

S

i2
i2

i1 i1

D2 I
D1
W1 W2
Quantity of loanable founds Investment

Figure 2

To explain the crowding out we have to know that government has to borrow money
in order to create new jobs. They will do this by selling treasury bills to banks, and then banks
will sell them to people who want to save money. Basically they will increase savings, which
are on Figure 2 presented as S. Price of savings is interest rates, so when we increase demand
for savings we will increase interest rates. Increase in interest rates will discourage the
business to invest so investment will fall from W2 to W1.

Low unemployment level will help the economy, but it is causing the inflation which
could have disastrous effect on the economy. In short run US can maintain this level of
unemployment, but in order to keep this way that will e forced to shift their long run supply.