Solved Problem: If Employment and Unemployment Both Increase, What Happens to the Unemployment Rate?

Supports: Macroeconomics, Chapter 9, Economics, Chapter 19, and Essentials of Economics, Chapter 13.

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In its “Employment Situation” report for July 2024, the Bureau of Labor Statistics (BLS) stated that according to the household survey the total number of people employed, the total number of people unemployed, and the unemployment rate all increased. Would we expect this result to always hold? That is, in a month in which both the total number of people employed and the total number of people unemployed increased will the unemployment rate always increase? Briefly explain.

Solving the Problem
Step 1: Review the chapter material. This problem is about calculating the unemployment rate, so you may want to review Chapter 9, Section 9.1, “Measuring the Unemployment Rate, the Labor Force Participation Rate, and the Employment-Population Ratio.” 

Step 2: Answer the question by explaining whether we can be certain what happens to the unemployment rate in a month in which both the total number of people employed and the total number of people unemployed increased.  The unemployment rate is equal to the number of people unemployed divided by the number of people in the labor force (multiplied by 100). The labor force equals the sum of the number of people employed and the number of people unemployed.

Suppose, for example, that the unemployment rate in the previous month was 4 percent. If both the number of people employed and the number of people unemployed increase, the unemployment rate will increase if the increase in the number of people unemployed as a percentage of the increase in the labor force is greater than 4 percent. The unemployment rate will decrease if the increase in the number of people unemployed as a percentage of the increase in the labor force is less than 4 percent.  

Consider a simple numerical example. Suppose that in the previous month there were 96 people employed and 4 people unemployed. In that case, the unemployment rate will be (4/(96 + 4)) x 100 = 4.0%.

Suppose that during the month the number of people employed increases by 30 and the number of people unemployed increases by 1. In that case, there are now 126 people employed and 5 people unemployed. The unemployment rate will have fallen from 4.0% to (5/(126 + 5)) x 100 = 3.8%.

Now suppose that the number of people employed increased by 30 and the number of people unemployed increases by 3. The unemployment will have risen from 4.0% to (7/(126 + 7)) x 100 = 5.3%.

We can conclude that what happened in July 2024 need not always happen. If both the total number of people employed and the total number of people unemployed increased during a given month, we can’t be sure whether the unemployment rate has increased or decreased.