Chapter 21: Problem 38

Under what condition would a decrease in unemployment be bad for the economy?

Short Answer

Expert verified

A decrease in unemployment may be bad for the economy when it is not accompanied by a rise in productive employment and is associated with negative factors such as underemployment, job insecurity, lower labor force participation, or unsustainable changes in the overall economy. To determine whether a decrease in unemployment is harmful, it is essential to examine the reasons behind the decrease and assess the broader economic implications of these reasons.

Step by step solution

1. Identify situations with decreasing unemployment

First, we can list possible situations where unemployment decreases. These may include: a) More people finding jobs b) People leaving the workforce (due to retirement, education, etc.) c) Government intervention to reduce unemployment (through subsidies or job creation programs)

2. Determine if the decrease in unemployment is linked to a rise in employment

To establish whether the decrease in unemployment is bad for the economy, check if the fall in unemployment leads to a rise in productive employment. If the decrease in unemployment does not translate into more people working, it may not be beneficial for the economy.

3. Investigate the reasons for the decrease in unemployment

Analyze the underlying reasons for the falling unemployment and their broader economic implications. These reasons could include: a) A rise in underemployment (part-time or temporary work instead of full-time, permanent jobs) b) People taking up low-productivity jobs or jobs in the informal economy c) An increase in the working-age population becoming inactive, e.g., due to early retirement or disability d) A decrease in labor force participation rate (e.g., discouraged workers) e) Brief or unsustainable changes in employment due to temporary government subsidies or policies

4. Evaluate the overall impact on the economy

Once the reasons behind the decrease in unemployment have been identified, assess the overall impact on the economy. If the decrease in unemployment corresponds to one or more of the following factors, it may be bad for the economy: a) Lower productivity, which affects economic growth b) An increase in underemployment, which can lead to a lower standard of living for workers c) An increase in job insecurity, adversely affecting worker's well-being d) Inactive working-age population, which leads to a smaller overall workforce to support the economy e) Brief or unsustainable changes in employment that can lead to economic instability

Conclusion

A decrease in unemployment is bad for the economy when it is not accompanied by a rise in productive employment, when it is associated with negative factors such as underemployment, job insecurity, or lower labor force participation, and when it leads to unsustainable changes in the overall economy. To determine whether a decrease in unemployment is harmful, examine the reasons for the decrease and assess the broader economic implications of these reasons.