This lesson uses the latest employment and unemployment data release by the U.S. Department of Labor, Bureau of Labor Statistics, for the month of November, reported Dec. 5, 2014. The lesson presents the role that seasonality plays in unemployment and employment.

KEY CONCEPTS

Cyclical Unemployment, Employment, Employment Rate, Frictional Unemployment, Full Employment, Labor, Labor Market, Structural Unemployment, Unemployment, Unemployment Rate

STUDENTS WILL

  • Examine the latest BLS report on unemployment and identify those sectors that experienced the greatest gains in employment
  • Discover the rationale for seasonally adjusting unemployment/employment data
  • Analyze the differences between adjusted and unadjusted data
  • Understand the circumstances under which each data series should be used

Current Key Economic Indicators

as of December 9, 2014

Inflation

The Consumer Price Index for All Urban Consumers (CPI-U) was unchanged in October on a seasonally adjusted basis. Over the last 12 months, the all items index increased 1.7 percent before seasonal adjustment. Gasoline and other energy indexes declined, offsetting increases in shelter and other indexes to leave the seasonally adjusted all items index unchanged. The core inflation index rose 0.2 percent in October.

Employment and Unemployment

According to the November report of the Bureau of Labor Statistics, the unemployment rate stayed constant at 5.8%, while total nonfarm employment rose by 321,000. Employment gains continued in retail trade, food services and health care, but also extended to a number of white collar job sectors as well, including financial, insurance, and real estate. In addition, the number of long-term unemployed (those unemployed at least six months) fell by over 100,000.

Real GDP

The revised estimate for real GDP growth in the third quarter of 2014 was 3.9%, an increase from the initial estimated third quarter growth of 3.5%, but down slightly from the second quarter growth of 4.6%. All components of GDP experienced increases in the third quarter, with the exception of private inventories, which decreased slightly.

Federal Reserve

The FOMC believes that the labor market has shown considerable improvement and the risks of inflation rising above its 2% target are low. Therefore, the Federal Reserve announced plans to end its purchase of financial assets. In addition, the federal funds rate will remain at its current low level. However, the FOMC has signaled its willingness to increase the federal funds rate if inflation shows signs of rising above the 2% target.

INTRODUCTION

On the first Friday of every month, the Bureau of Labor Statistics (BLS) releases data from two different surveys to report on the employment and unemployment situation in the U.S. The U.S. Census Bureau collects data from 60,000 households to generate the official unemployment rate. These data are reported by age, sex, race, industry, geographic area, and more.

The BLS also conducts the "payroll" or "establishment" survey, which includes 160,000 businesses and government agencies, representing approximately 400,000 individual work sites. These data include hours of work, payroll and benefit costs, number of employees, and other measures. Because the criteria for inclusion in these two surveys differs, the resulting measures are different, sometimes significantly so.

This lesson uses the BLS Employment Situation for November, 2014, to explore the role of seasonality in the labor market, how seasonality is addressed, and the purpose of using adjusted vs. unadjusted data.

RESOURCES


Key Economic Indicators

as of December 9, 2014

Inflation

The Consumer Price Index for All Urban Consumers (CPI-U) was unchanged in October on a seasonally adjusted basis. Over the last 12 months, the all items index increased 1.7 percent before seasonal adjustment. Gasoline and other energy indexes declined, offsetting increases in shelter and other indexes to leave the seasonally adjusted all items index unchanged. The core inflation index rose 0.2 percent in October.

Employment and Unemployment

According to the November report of the Bureau of Labor Statistics, the unemployment rate stayed constant at 5.8%, while total nonfarm employment rose by 321,000. Employment gains continued in retail trade, food services and health care, but also extended to a number of white collar job sectors as well, including financial, insurance, and real estate. In addition, the number of long-term unemployed (those unemployed at least six months) fell by over 100,000.

Real GDP

The revised estimate for real GDP growth in the third quarter of 2014 was 3.9%, an increase from the initial estimated third quarter growth of 3.5%, but down slightly from the second quarter growth of 4.6%. All components of GDP experienced increases in the third quarter, with the exception of private inventories, which decreased slightly.

Federal Reserve

The FOMC believes that the labor market has shown considerable improvement and the risks of inflation rising above its 2% target are low. Therefore, the Federal Reserve announced plans to end its purchase of financial assets. In addition, the federal funds rate will remain at its current low level. However, the FOMC has signaled its willingness to increase the federal funds rate if inflation shows signs of rising above the 2% target.

PROCESS

  1. Direct students to the latest employment situation release from the Bureau of Labor Statistics for November, 2014.Ask students how total nonfarm employment increased in the month of November (321,000). Ask that effect this increase in employment had on the unemployment rate (the unemployment rate stayed the same at 5.8%).

    Ask students how this many people could be added to the rolls of the employed and the unemployment rate not decrease (if the unemployment rate stayed the same, that means that more people came into the labor force, including those who had given up looking for work and were therefore, not counted as being unemployed).
     
  2. Ask students which industries had the largest employment gains (professional and business services; retail trade; education and health services; leisure and hospitality). Ask how November's gain differed from that of the previous month (in October, most of the gains were in retail, and food industry). Ask students which of the growth sectors in November have relatively higher wages (professional and business services).
     
  3. Ask students to put themselves in the position of a business owner who has weathered the recession and is just now starting to see business pick back up. Ask them if there is another way to handle the need for more labor other than to hire new workers (they could increase the work week of existing workers). Ask why business owners are more likely to do this than hire (it's costly to hire new workers--increasing the work week is a less risky way to increase production). Ask students if this strategy will work indefinitely (no--at some point, the only way businesses can increase production is to hire new workers).

    Ask students to look at the November report again. Based on the information about the length of the average work week, do they think the gains in employment will continue (since the work week is increasing, businesses are experiencing increased demand that is likely to continue to result in additional hiring).
     
  4. Tell students that the unemployment rate over a 3-month period has gone from 7.0% to 5.9% Ask what conclusions they would reach  (they will probably say that the economic has experienced a significant rebound in the labor market; the economy has strengthened; some might say that inflationary pressures could start to be a problem).

    Tell students that over another 3-month period, the unemployment rate dropped from 8.5% to 7.1%. Again, ask for their conclusions.



    Draw students attention to the graph, particularly the red line. Point out that the two examples you gave are the seasonally unadjusted unemployment rate drop between January and April for 2014 and 2013, respectively.

    Ask students if they would draw different conclusions about the health of the economy based on this new information (they should recognize that the economy didn't experience a tremendous surge of strength--it simply exhibited a general pattern that holds over the same three months every year).
     
  5. Point out to students that the red line--representing the unadjusted unemployment rate--exhibits a high degree of variability, but also make sure they see that this variability occurs in repeated patterns. Draw students' attention to these patters and ask what they think is causing them (e.g., fall in unemployment at holiday time; increase in the summer when students are in the labor force; increase in unemployment in January and February when construction activity declines).
     
  6. Tell students that the example of the unemployment rate over the 3-month period that you gave them in #4 above, illustrates a common problem with economic data. When, in the course of a year, data exhibit patterns with respect to timing, magnitude, and direction, it would be incorrect to draw conclusions on the basis of that data. In the example above, the drop in the unemployment rate does not necessarily reflect an improving economy--the same pattern occurs every year. We can't know what the true trend is unless these patterns are accounted for--the data needs to be seasonally adjusted.
     
  7. Call students' attention to the blue line in the graph. Tell them that this line represents the unemployment rate with the patterns taken into account. Ask students what they notice about this line (it exhibits less variability than the unadjusted rate; it is trending down over time).

    (Note: make sure students understand that the unadjusted unemployment rate is the actual rate. The adjusted rate is a more accurate reflection of any particular month's rate, compared to that same month in other years. For example, the true unemployment rate fell from January to April of 2014 from 7.0% to 5.9%. What the adjusted rate over that time period tells us (decline from 6.6% to 6.3%) is that the decrease in the unadjusted rate was larger then usual pattern for that same time period. In other words, the seasonally adjusted rate answers the question: how does the unadjusted rate compare to previous periods?)

     
  8. Draw students' attention to the fact that the peaks on the unadjusted graph, while still existent, show a pattern of declining over time. Ask students what this pattern implies about the seasonal unemployment rate--the blue line (since the unadjusted peaks--from January to January, for example--are falling, the seasonally adjusted rates, by definition, must be falling). 

ASSESSMENT ACTIVITY

CONCLUSION

Seasonal adjustments are commonplace in economic data. When comparing data from month to month, it is critically important to correct for any patterns that occur. These patterns could arise from variations in weather, production cycles--any event(s) that causes the same timing, magnitude, and direction of change every year. 

EXTENSION ACTIVITY

Tell students that you are interested in comparing the annual unemployment rate in  2010 to 2013. Ask students if the adjusted or unadjusted rate should be used in this case and why (the unadjusted rate should be used; there is no need to account for patterns in the data when comparing annual rates because there are no patterns between years, only patterns within years.)

EDUCATOR REVIEWS