Question

Explain the relationship between the unemployment rate and economic growth, and why the unemployment rate is or is not significant to the economy.

Answer 1

Economic growth refers to the increase to the production of economic goods and services and unemployment rate is ratio of people unemployed in an economy and people are I labour force. The relation between economic growth and unemployment may not be witnessed in short run. When the economic growth is seen in an economy after a period of recession. Unemployment rate may not fall as the firms tries to increasing output by raising the productivity of the existing workers.

But to increase the output need to increase the productivity for which need to hire new workers. Output growth is the summation of labour supply and labour productivity. Which indicates economic growth and rise in employment and if it rise above the level of labour force- unemployment will fall.

Generally rise in economic growth indicates fall in unemployment rate, when the potential output in an economy are utilized fully (like the capital, labour). It could raise the productivity and can decrease he unemployment rate.

The relationship between the economic growth and unemployment rate is not always inverse. But fall in unemployment rate and rise in economic growth indicates towards a healthy economy.

Unemployment rate is significant for economy

1. It determines the health of the economy and helps to make the monetary policy.

2. It is used by the investors to understand the conditions of labour market

Unemployment rate is not significant for economy

1. Unemployment rate is low when the recession is started and it difficult to understand when the nation has entered into recession.

2. When the additional job unable to create enough productivity, it could create output gap. In fact very low level of unemployment increases negative consequences such as inflation, reduces productivity.