Comparison of Unemployment Rate to Inflation and GDP Since 1929
Updated : January 22nd, 2018
When it comes to the unemployment rate in America, it is based on the percentage of the total unemployed labor force throughout the country. This helps in reviewing the country’s economy through the years. With this, we understand that unemployment rises during recessions and falls on the rebound. You should know that unemployment declined during the 5 US wars and mainly during World War II. But quickly after the wars ended, there was a spike in recession. During the Great Depression, America faced its highest rate of US unemployment at 24.9 percent in 1933. While in 1931 to 1940, unemployment was more than 14 percent and remained in single digits till 1982 when it rose to 10.8 percent. It was during the Great Recession of 2009 that the annual unemployment rate reached 9.9 percent in 2009.
You should know that the lowest unemployment rate was 1.2 percent in 1944. But, you should know that unemployment can get lower based on economic policies and the outcome of companies gaining a foothold in new countries. This means that for a healthy economy, there should be a natural rate of unemployment that should follow.
This is usually because people move before they settle down in their new job. Otherwise, they get retained for a better job or stay unemployed and look out for work and wait for the right job. Even when the unemployment rate is 4 percent, it can be tough for companies to expand since they would have a hard time recruiting new good workers.
Unlike previous years, unemployment is now at a 44 year low at just 4.1% with several proactive measures brought in to ensure a higher minimum wage and employment opportunities for all.
Since unemployment cycles coincide with business cycles, job employment solely depends on whether there are enough good candidates to fill these vacancies. You should know that slow growth hampers employment and in fact causes high unemployment. With the decline in the gross domestic product, businesses will have to lay off workers. This will make jobless workers spend less. Now with lower consumer spending, there is a significant reduction in business revenue in this time period. This forces several companies to make more payroll cuts to reduce their costs and the downward cycle on workers is simply devastating.
Remember that unemployment rate is used as a lagging indicator. What this means is that it continues to worsen even as economic growth improves. Companies are hesitant about hiring workers back only when there are sustainable growth and a stable upward trend. That means that when the unemployment rate reaches 6 percent, the government will have to step in. Based on the turn of events the Federal Reserve uses expansionary monetary policy and will lower the federal funds rate. When the unemployment continues, Congress will step in to use its fiscal policy. It can create jobs for public work projects. It can also stimulate demand by providing extended unemployment benefits. The main way to ensure a healthy economic growth rate is by ensuring that there is a steady increase by 2-3% to create 150,000 jobs.
Just so you know! There are only two ways to get a country back on track.
Countries either choice the usual route of a monetary policy which is a quick fix where money is pumped in to drive growth. Otherwise, the more difficult fiscal policy is used to stimulate the economy with tax spends.
Monetary policy is usually the first solution for a quick and effective method. A lower interest rate will make it easier for families to borrow and solve their needs. This includes items like homes, cars, and electronics. It will stimulate enough demand to put the economy back on track. With a lower interest rate, your business can borrow at a lesser rate. This allows them the capital to hire more workers to meet the growing demand.
If all measures under this stimulus fail then it will mean that the government needs to make rate cuts and feed the economy with increased taxes to boost businesses. This helps businesses make more money from people that buy into their products once they have the disposable income to make their purchases.
A second method is by using the Fiscal policy. This is done by increasing or cutting taxes to stimulate the economy. With an expansionary fiscal policy, there will be a slower time for it to come into effect. Both Congress and the President have to agree on the next steps that follow. This can be more effective when it is executed. This will give the government some teeth to turn things around. The main thing is to gain the confidence of the people by convincing them of a better future. Cutting taxes works in the same manner as reducing interest rates. Both help businesses and consumers to spend more. This increase in demand will provide businesses with more money to invest and hire more workers. Government spending usually takes the form of creating jobs. When the government hires employees, they can do so directly or with contracts through companies to provide services. This provides customers with cash to buy more essential products.
In order to best judge the situation across the length and breadth of the US, you should weigh the unemployment rate against GDP growth and inflation. You will find a table below representing unemployment since 1929 when the stock market crashed. This table compares the unemployment rate, GDP growth, and inflation.
U.S. Unemployment Rate Over The Last 89 Years
|Year||Unemployment Rate||GDP Growth||Inflation|
US Inflation Rate
When it comes to the inflation rate, it is the percentage change in prices from one year to the next. These changes result in a business cycle. The first phase is the expansion where growth is positive and the country can see a 2% inflation. When the economy expands beyond 3 percent, it will create an asset bubble. The second phase is the peak when the expansion ends and contraction begins. Well in the third phase, you will find a contraction which results in a recession. Inflation usually falls below 2.0 percent and then deflation looms. The fourth phase is called the trough and this is the month when the contraction ends and the expansion begins. You should know that inflation responds to monetary policy that is enacted by the Federal Reserve. The Federal Reserve will focus its attention on the core inflation rate and will exclude things like volatile gas and food prices. The Fed sets a target inflation rate of two percent. If the core rate rises much above that, the Fed will execute a contracting monetary policy which increases interest rates and shuts down demand and thereby lowers prices.
US Records 10 Years with 3 percent growth
For a record 10 straight years, the United States has had 3 percent growth in Gross Domestic Product based on data by the Bureau of Economic Analysis. In 85 years since the BEA’s existence, the annual change in real GDP there was only one ten-year stretch between 2006 to 2015. This is because real annual growth in GDP peaked in 2006 at 2.7 percent. After which it has never been this high again. The last recession ended in June 2009. In 6 calendar years from 2010 to 2015, real annual GDP growth has never exceeded the 2.5 percent it reached in 2010. The longest consecutive stretch of years in which the US saw real growth by 3 percent or better was a seven-year period between 1983 to 1989. The second longest period was a growth of 3 percent between 1939 to 1944 during World War II. In the last two years, annual growth has been stagnant at 2.44 percent. In the fourth quarter from 2016 to 2018, it is projected to grow only by 2.7, 2.5 and 2.4 percent.
This primarily means that a steady growth rate of 3 percent is good for the economy. But, unless there is higher growth the economy will tend to stagnate and the number of jobs that are open for new faces will not grow significantly and this will create a problem if the number of new openings does not increase year-on-year, the unemployment rate does not fall further. If it depends solely on government policy through correction to make America continue its growth trajectory which does not rely solely on government jobs and contracts.