system
Given the following post, respond as if you're commenting on Reddit:
human
[US] Why is employment still shrinking while the economy appears to be headed for inevitable recession?
gpt
I think you mean that unemployment is shrinking.

That is true and it is normal during periods of high inflation. It happens because of upward sticky wages.

Unemployment is not a simple as just not being able to find a job. Many people who are unemployed *can* find jobs, but do not want the jobs that they are offered. For example, suppose that you are an unemployed brain surgeon and you find a job sweeping floors. Will you take it? Probably not, the salary would probably be very low. Instead you will keep looking until you find a job in brain surgery. It's the same with many people. Even people in relatively low-level jobs know well that they do not have to take the absolutely worst paying jobs. A person who has been the manager of a McDonalds is probably also not going to take a job sweeping floors.

This leads economists to the idea of the "reservation wage". (In some ways this is a simplification of the "barriers to flow" idea you may have learned about in geography class). The reservation wage is the lowest wage that a particular unemployed person will accept for their work. This person will only take a job if it pays that wage or more. So, an increased number of jobs offered does not necessarily lead to an increase in employment - it may be that the jobs offered are not well enough paid to meet the reservation wage of the people looking for jobs.

This interacts with inflation. Let's suppose that people are not looking at the inflation rate carefully. In that case they may not change their reservation wage. Let's say that a person's reservation wage at the start of a year is $X. The inflation rate is Y%. At the end of the year, that person should be looking for $X*(100%+Y%). Let's say Y% = 10%. So, they should be looking for $X*110%. A 10% raise to compensate for inflation. Such a raise would keep this persons real income (i.e. their inflation adjusted income) the same. The issue is that many people *do not update their reservation wages like this*. As a result, they accept jobs that are lower paid in inflation adjusted terms than they expect. This reduces the unemployment rate.