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Why is Unemployment so Low When Inflation Remains High?

Inflation has been high for nearly two years. Yet unemployment is low, much lower than expected as a matter of fact. This economic situation is not unprecedented, however. It is quite normal. Inflation has historically had an inverse relationship with unemployment. This means that when inflation rises, unemployment drops. Higher unemployment, on the other hand, equates to lower inflation. When more people are working, they have the power to spend, which leads to an increase in demand. The only time when inflation and unemployment increased simultaneously was in the 1970s, which led to “stagflation.” Stagflation was caused by a number of factors such as oil price shocks, price control, and the removal of the gold standard. The current condition of the macroeconomy is not in a “stagflationary” stage.

Source: U.S. Bureau of Labor Statistics

Spending has decreased over the subsequent month because of the rate of inflation, which remains quite high. The many layoffs that we are witnessing come mainly from publicly traded companies in the tech industry, which represents only a portion of the macroeconomy. As we can see, from January 2021 to 2023, unemployment rate dramatically plummeted from 6.4% to 3.4%. The number of persons jobless than 5 weeks decreased to 1.9 million in January, and the long-term unemployed was essentially unchanged at 1.1 million.

Inflation has been at high levels due to a dramatic increase in the supply of money through stimulus checks that led to consumer spending, a rise in demand, and a rise in the general level of prices, which eventually outstrip supply. Though, one factor behind the consistent decline in unemployment is the slow recovery in the labor force participation rate since the onset of COVID. Unemployment rate remained low despite rounds of layoffs at tech companies and growing fears of an oncoming recession. It is important to know that in the 1950s, labor force participation rates were about 59% or 60%. That rose steadily through the 1990s, when it peaked at about 67%. And this increase can be attributed to changes such as more women entering the workforce and a younger population. The labor participation rate has been recently low and there are few explanations for it. (1) increased dependent care needs, (2) fear of catching the coronavirus, (3) higher unemployment benefits, (4) desire for higher wages reducing interest in low-paying jobs, (5) higher pace of retirements due to an aging population, (5) slower population.

Unemployment isn’t low because President Biden is creating jobs. As a matter of fact, there were nearly 118 million private sectors in May 2020, representing 85 percent of U.S. employment. That means that the public sector only creates 15% of the job market. The federal government does not create new occupations that didn’t previously exist. It only adds new people to occupations that already exist. In the private sector, people are creating new businesses every single day; therefore; they are creating new positions that did not previously exist because every business needs labor in order to be functional. These new positions created add value to the economy. It is therefore misleading to believe that President Biden is the reason why unemployment is so low.




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