7%, meaning paychecks are probably trailing inflation, said Lynn Reaser, chief economist at Bank of America's Investment Strategies Group." It can be assumed that this will lead to decreased spending by consumers. The fact that wage rate increase is not staying up with the level of inflation along with the slow down in new jobs may have an additional effect on the lack of consumer spending and sluggish markets when it is coupled with the increasing price of gasoline. "Oil price, which hit a record high of more than $75 a barrel in late April, are now hovering above $71 a barrel. Gasoline prices have topped $3 a gallon in some areas" (Aversa).

The rate of unemployment also has a substantial relationship with the gross domestic product. Because people are anticipated to spend less money on goods in the near future, businesses will start to produce less goods to keep supply in line with the sagging demand. When business output remains stagnant or decreases, the need for additional workers also decreases. Therefore, if consumers move into more of a saving mode than a spending mode as anticipated, the rate of unemployment will not improve and could even begin to increase as the need for new workers is directly dependent on the rate of production needed to satisfy demand in the product market.

A stagnant unemployment rate and the small gains in the wage rate, however, generally have a positive effect on inflation. Because wage rates are not increasing and companies are not hiring more workers, companies do not have to pass the increased cost of labor off to the...

Therefore, if the rate of unemployment does increase, this should not trigger the inflation rate to increase. However, the fact that oil prices have been increasing dramatically may have an effect on this trend as these high oil prices may now need to be passed off onto the consumer which may lead to inflation. To ward off inflation the Federal Reserve may manipulate interest rates. "The Fed is in a tricky spot. It wants to make sure energy prices don't spark broad inflation and it also doesn't want its rate increases to crimp economic activity too much" (Associated Press).
In conclusion the rate of unemployment is at a low point calculated this month at 4.6%; however, because the number of new jobs being created has been slowing down recently, this number may not reflect as positively on the economy as one would think. Due to increased oil prices, inflation may soon be on the rise and consumer's wage rates are not keeping up with that pace. This may led to less consumer spending causing the demand on the product market to decrease and the gross domestic product to decrease with it. This will in turn affect the demand for new workers in the labor market which can negatively affect unemployment rates.

Works Cited

Associated Press. U.S. Economy Loses Steam. CBS NEWS.com. June 2, 2006. http://www.cbsnews.com/stories/2006/05/05/business/main1591439.shtml

Aversa, Jeannine. Job Growth Slows; Unemployment Rate Drops. Forbes.com. June 2, http://www.forbes.com/feeds/ap/2006/06/02/ap2790533.html