Many people say that, as long as there are any unemployed people – and especially as long as there are long-term unemployed – more jobs are needed. But creating more jobs doesn’t always reduce unemployment, and never reduces it by much.

Source: STATS Indiana; Bureau of Labor Statistics/Local Area Unemployment Statistics

This chart shows monthly variation in employment and unemployment in Indianapolis over seven years. This chart shows the magnitude of change, but not the direction.

In any given month, the change (up or down) in employment is greater than the change in unemployment, often by 3,000 or more. In one extreme example from May 2006, employers added 4,994 new jobs, but unemployment declined by only 766.

Most of the new jobs were taken by new entrants to the labor force – not by people who were unemployed.

When employment dips, some people change from employed to unemployed. But others drop out of the labor force and are not counted in either category. This phenomenon is discussed in detail in the upcoming page on labor force participation.

Usually an increase in jobs leads to a decline in unemployment, but the decline is much smaller than the number of new jobs. In the seven years shown in the chart, an increase of 100 jobs, on average, reduced unemployment by only about 32. And even this does not always hold true.

The labor supply often expands and contracts along with the supply of jobs. People enter the labor force when they think their chances of getting a job are good. Every summer, thousands of jobs are created, but an even larger number of people turn out to compete for them. So each June, employment goes up and so does unemployment. In September, the opposite happens. Lots of jobs disappear, but unemployment declines at the same time because the labor force contracts.