The Federal Reserve, in its policy analysis, must carefully
weigh incoming data and evaluate likely future
outcomes before determining how best to obtain its
twin goals of employment growing at potential and
price stability. It is tempting to regard high or rising
unemployment as a sign of a weak economy. And, normally,
a weak economy is one with little inflationary
pressure and, therefore, room for expansionary monetary
policy to stimulate growth. But unemployment is
influenced by more than simply aggregate conditions.
In a dynamic economy that responds to changing opportunities,
some industries are shrinking while others
are growing. Labor must flow from declining industries
to expanding ones. This adjustment takes time. It takes
time for employees in declining sectors to learn about
new opportunities in other industries, acquire necessary
skills, apply for job openings, and potentially relocate.
And during this period of adjustment, the unemployment
rate rises as waning industries lay off workers.
Thus, the unemployment rate may increase or decrease,
even though the aggregate state of the economy remains
stable, simply because the labor market adjusts to
shifting patterns of production.