Question

Employment tends to a. lag the cycle. b. lead the cycle. c. be coincident with the cycle. d. sometimes lead, sometimes lag the cycle.

Answer 1

Answer:

A) lag the cycle.

Explanation:

One of the basic mistakes made by classical economists is that they believe that wages and employment are economic variables that can be easily controlled like money supply or interest rates, when actually they are extremely inflexible and they usually vary much less than the economic cycle.

For example, no employee will accept a pay cut, it is easier for the company to fire him than to convince him/her o earn less money. This is logical since I wouldn't accept a pay cut and you probably wouldn't either. Employment as a whole is more closely related (but in the opposite direction) to the inflation rate than to the economic cycle.

Even the government (at all 3 different levels) tries to avoid massive layoffs since a person fired is not simply a lower cost, but it has negative impacts on the economy as a whole and at social and community levels also.

You must also remember that it sometimes is much easier to fire someone than to hire him/her again or someone with similar skills to perform a job once the economy rebounds.

Answer 2

Answer:

The correct answer is letter "A": lag the cycle.

Explanation:

Business Cycle Indicators (BCI) are variables pooled in an index that helps to measure the health of an economy. The main variables included considered BCI are production and employment. Usually, economic cycles are characterized by an increase in production and employment and after reaching its highest peak comes to a decline heading towards the economy's lowest point.  

Employment tends to lag the cycle because it measures how the economy performed. It cannot lead the cycle since employment does not predict future events.