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 October, reported Nov. 7, 2014. The lesson presents the kinds of unemployment and asks students to think about what the optimal level of unemployment is and how unemployment and inflation are linked.

KEY CONCEPTS

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

STUDENTS WILL

  • Examine the latest BLS report on unemployment and identify those sectors that experienced the greatest gains in employment
  • Identify the kinds of unemployment
  • Discuss the "optimal" level of unemployment
  • Analyze the relationships between unemployment and inflation

Current Key Economic Indicators

as of November 10, 2014

Inflation

The Consumer Price Index for All Urban Consumers increased 0.1 percent in October on a seasonally adjusted basis. The core inflation rate increased the same amount. For the previous 12 months, the index increased 1.7%, the same rate as reported in the September report.

Employment and Unemployment

According to the October report of the Bureau of Labor Statistics, the unemployment rate fell from 5.9% to 5.8%, and the number of individuals unemployed also decreased. Total nonfarm employment rose by 214,000 in October. Employment gains were concentrated in retail trade, food services and health care.

Real GDP

The advance estimate for real GDP growth in the third quarter of 2014 was 3.5%, a decrease from the revised second quarter growth of 4.6%. Inventory investment reduced third quarter growth, while it added to second quarter growth. In addition, consumer spending increased at a lower rate in the third quarter, compared to the second. Finally, business investment increased in the third quarter, but at a lower rate than in the second quarter.

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 October, 2014, to explore the kinds of unemployment, the "optimal" level of unemployment, and how unemployment is related to inflation. 

RESOURCES


Key Economic Indicators

as of November 10, 2014

Inflation

The Consumer Price Index for All Urban Consumers increased 0.1 percent in October on a seasonally adjusted basis. The core inflation rate increased the same amount. For the previous 12 months, the index increased 1.7%, the same rate as reported in the September report.

Employment and Unemployment

According to the October report of the Bureau of Labor Statistics, the unemployment rate fell from 5.9% to 5.8%, and the number of individuals unemployed also decreased. Total nonfarm employment rose by 214,000 in October. Employment gains were concentrated in retail trade, food services and health care.

Real GDP

The advance estimate for real GDP growth in the third quarter of 2014 was 3.5%, a decrease from the revised second quarter growth of 4.6%. Inventory investment reduced third quarter growth, while it added to second quarter growth. In addition, consumer spending increased at a lower rate in the third quarter, compared to the second. Finally, business investment increased in the third quarter, but at a lower rate than in the second quarter.

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. Refer students to the latest release from the Bureau of Labor Statistics, dated November 7, 2014:
    www.bls.gov/news.release/empsit.nr0.htm

    Ask what the latest data show about the unemployment rate [It fell from 5.9% to 5.8%.] Ask which industries experienced the greatest employment gains [Food service, health care, retail trade.] Ask students if they think these new jobs are low-pay, high-pay, or somewhere in the middle [Most will probably recognize that these are low-pay jobs, although a few might have examples of higher paid jobs within these industries.]
     
  2. Ask students what they think the optimal unemployment rate would be [Most will probably say 0%.] Remind them that even at 0%, that doesn't mean that every single person age 16 and over has a job. The unemployment rate is the ratio of those who are not working but would like to, to the labor force. Many individuals are not working, but don't wish to, or are unable to because of disability, for example--these people are not in the labor force.
     
  3. Present (or review) the three kinds of unemployment:

    Frictional: unemployment that occurs when workers either (1) leave a job and take some time finding another job; or (2) leave school or training and experience some period of unemployment before a job is found. In either case, frictional unemployment is usually of short duration and involves workers searching for a job that is a good fit. 

    Cyclical: unemployment caused by falling demand for goods and services in recessions. Companies respond to this decrease in demand by cutting production and employment, creating more workers than available jobs. 

    Structural: unemployment that results when workers' existing skills are not in demand in the labor market, and/or workers do not possess the skills that employers do demand.
     
  4. Ask students again what they think the optimal unemployment rate is [Some may realize that 0% is not the right answer.] Ask if it would be good for the economy if there were no structural unemployment [yes]; no cyclical unemployment [yes]; no frictional unemployment [No--frictional unemployment results when workers search for jobs that are a better fit, resulting in an increase in efficiency.]

    Tell students that 0% is not the right answer, first because frictional unemployment is necessary for workers to find jobs that are good fits. To explain the second reason, ask students what a 0% unemployment rate implies about the demand for labor [It is very high.] Ask what happens to the price of something when its demand is high [The price goes up.] Tell students that the same thing happens in the labor market when the demand for workers is high--the wage rate is bid up. So a 0% unemployment rate would come with high wages, which drives up the overall price level; i.e., inflation (wage-push inflation) would be high.
     
  5. Ask students what the "optimal" unemployment rate is, given that a 0% unemployment rate is not. Lead them to understand that the unemployment rate is connected to the rate of inflation, as discussed above. If the unemployment rate is "too low", the economy would experience inflationary pressure. Therefore, there is a limit on how low the unemployment can go without experiencing the costs--inflation. That lower limit is called the natural rate of unemployment; i.e., it is the unemployment rate that is sustainable without triggering increased inflation. The current thinking is that an unemployment rate in the neighborhood of 5.5% is the natural rate and can be sustained while maintaining price stability.

    Ask students what they think would happen with inflation if the unemployment rate fell to 5.4% [Answers will vary, but they might say that inflation would increase.] Make sure students understand that 5.5% is not an absolute threshold, the crossing of which would immediately trigger inflation. The natural rate of unemployment is more a range within which the economy is considered healthy and prices are stable.

ASSESSMENT ACTIVITY

CONCLUSION

Students learn about the three kinds of unemployment and why some kinds are more costly to the economy than others. The "optimal" level of unemployment is discussed, and the natural rate of unemployment is introduced. Students also develop an understanding about the relationship between unemployment and inflation.

EXTENSION ACTIVITY

Remind students that the current unemployment rate is 5.8%, and is getting close to the natural rate of unemployment of 5.5%. Ask students what they think the Federal Reserve is likely to do if the unemployment rate continues to fall. [The Fed will start raising the federal funds rate to keep the economy from overheating, which would increase inflation. You can use the car analogy to make this point. Up until very recently, the Fed has been pushing down the gas pedal on the economy with its buy-back programs. Recently the Fed announced it was stopping the buy-back, so it has taken its foot off the gas. If the unemployment rate continues to fall, threatening to lead to inflation, the Fed will start tapping the brakes.]

EDUCATOR REVIEWS