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 March, 2015, reported April 5, 2015. The lesson focuses on the continued depression of hourly wages, and investigates the effects of the recent announcements by several companies to raise the pay of their workers.
- Examine the latest BLS report on unemployment and identify those sectors that experienced the greatest gains in employment
- Explore how the average hourly wage and average hours worked have changed
- Analyze the effect on the economy of the announcement that WalMart is raising its hourly wage
- Discuss the reasons that companies would raise the wages for their employees
Current Key Economic Indicatorsas of April 4, 2015
The Consumer Price Index for All Urban Consumers (CPI-U) increased 0.2% in February on a seasonally adjusted basis. Over the last 12 months, the all-items price index was unchanged. The energy index increased after several months of decline. Core inflation rose 0.2% in February, the same increase as in January.
The unemployment rate stayed at 5.5% in March, 2015, according to the latest release from the Bureau of Labor Statistics on April 3, 2015. The number of jobs added was much lower than in previous months, with only 126,000 new jobs added to the economy, the fewest number since December of 2013. Some job categories added workers, including health care, professional and business services, financial services, and retail. Average hourly wage growth was 7 cents, but average hours worked fell.
Real GDP increased 2.2% in the fourth quarter of 2014, according to the final estimate released by the Bureau of Economic Analysis. This estimate is consistent with the revised estimate. In the third quarter, real GDP increased 5.0%. Consumer spending rose 4.4%, compared to 3.2% in the third quarter. Business investment and exports also increased. Offsetting these gains were increases in imports and decreases in federal government spending, particularly defense spending. (
In its March 18, 2015, statement, the FOMC cited the continued growth of the labor market, increased household and business spending, and below-target inflation as indicators of an economy that continues to recover. They expect below-target inflation to rise as oil prices increase in the medium term. The statement reaffirmed the FOMC intention to keep the federal funds rate at its current low level, but also said that a rate hike was highly unlikely at its April meeting. Notably, the FOMC dropped the word "patient" from its language describing its stance on an improving economy and a rate hike. The Fed revised downward its economic projections, including the rate of unemployment that would sustain a stable inflation rate.
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.
The lack of increases in the average hourly wage has been one of the remaining weaknesses in the economy. Recent announcements from some companies, including WalMart, might signal that average wages will start to increase. This lesson investigates the effect of this kind of raise on the economy.
- A good overview of how the BLS collects and categorizes data: www.bls.gov/cps/cps_htgm.htm
- The difference between the household and establishment surveys: www.bls.gov/news.release/empsit.tn.htm
- A good discussion of the implications of the two surveys and how, together, they give a more complete picture of the labor market: www.bls.gov/web/empsit/ces_cps_trends.pdf
- A good article on the basic definitions of the three types of unemployment: economics.about.com/od/unemployment-category/a/Types-Of-Unemployment.htm
Direct students to the latest news release for employment from the Bureau of Labor Statistics for March 2015
Ask, how much did the unemployment rate change--the U3 measure? (it didn't change--it stayed at 5.5%). How many jobs were added to the economy in March? (126,000). How does this number compare to previous job additions? (it is much lower--the addition for February was 266,000).
Ask students what industries saw increases in employment (professional and business services, health care, financial services, retail). Ask students what industries saw declines in employment (logging and mining, construction, manufacturing, food service). Ask students how the lower gas prices have affected employment (the logging and mining category includes oil drilling and supported jobs, so yes, the lower gas prices have caused layoffs in this industry). Ask if they can think of another reason this particular month's employment numbers might have been lower, especially given what industries were negatively affected (the harsh winter affected the jobs numbers, mainly in construction; the West Coast port shut-downs have affected manufacturing).
Ask students what changed with respect to average hourly wages (they rose 7 cents an hour). How much have wages increased over the year? (2.1%) Ask if they think workers were made better off (anwers will vary--students might say yes, a little; or they might not think that 7 cents is enough to warrant conlcuding they're better off). Ask them what happened with the average hourly workweek (it decreased by 0.1 hours). Tell students that the increase in the hourly wage is offset by the decrease in hours worked, leaving workers earning less than they were before.
Tell students that one of the remaining weaknesses of the recession is the fact that workers' wages have not increased as much as they have been expected to, given that the unemployment rate has decreased so much. Tell students that sometimes an easy way to look at wages is in relation to how much they can buy in one time period compared to another.
Show students the White Castle Minimum Wage Index:
Point out that this demonstrates how much a fast food worker can buy with fast food worker wages. In 1980, a fast food worker could trade an hour's work for 12 White Castle sliders. In 2010, the minimum wage could buy 11, and at today's minimum wage, a fast food worker could only buy 10 sliders.
Ask students if they have heard about the announcement WalMart made about raising its pay for hourly workers (answers will vary).
Show them this excerpt from the press release:
Beginning in April, Walmart U.S. will increase its starting rate to $9 an hour or higher. By February 2016, all current associates will make $10 an hour or higher.
Show them another part of the coverage of this announcement:
As part of its biggest investment in worker training and pay ever, Wal-Mart told The Associated Press that within the next six months it will give raises to about 500,000 workers, or nearly 40 percent of its 1.3 million U.S. employees?
Remind students that the federal minimum wage is currently $7.25/hour. Ask if they think this move by WalMart will show up in the April employment report (released in May) in the form of an increase in average hourly wage (answers will vary).
Tell students that in order to be able to answer that question, we need to know how much this raise really amounts to. Tell students to assume that the average hourly workweek for WalMart employees is 30 hours per week, that they work 52 weeks a year, and that all 500,000 workers will receive the wages. Ask how many total hours of work these workers will work in a year (30 x 52 x 500,000 = 800 million hours). Ask what the first raise will be ($1.75/hour: $9 - $7.25). Ask how much more money that means workers will be paid, in total ($1.4 billion). Ask how much the raise is in the second year ($2.75/hour). Ask how much more money will occur in the second year ($2.2 billion)?
Ask students if they think this amount of increase in worker pay will have an effect on the economy (answers will vary). Remind students that the economy generates about $17 trillion a year. Ask what percentage of total economic activity the first year of the raise represents (1.4B/17T = 0.01%). Ask if this is a valid comparison (answers will vary, but someone should recognize that wages and salaries are not all of GDP).
Tell students that wages and salaries make up about $7.1 trillion, or 42.5% of GDP. Ask again what percentage the raise will be of total wages and salaries (1.4B/7.1T = 0.02%).
Tell students that what was assumed in those calculations was that all 500,000 workers would receive a raise. Ask if they can think of any circumstances where a particular WalMart employee may not get a raise to $9/hour (many workers work in states that already have a state minimum wage at $9/hour or more--7 states and D.C. in 2015).
Tell students that other companies have announced that they are raising hourly pay for their workers, too. Ask if they've heard of what companies those are (answers will vary--the companies that have announced include McDonalds, Target, TJ Maxx, Marshall's, Home Goods, Ikea, Gap, Costco).???Ask students if they think the combined effect of these companies raising their wages will have an effect on average hourly wage (answers will vary--the effect is much more likely to be felt at the economy-wide level).
Tell students that a big expense for companies is employee turnover--the cost of hiring and training new workers is very high. Ask how these wage increases might help to keep the cost of turnover low (workers are less likely to leave a company if they are getting paid a wage that's higher than they might make someplace else).
Summarize by telling students that while one company raising their wages doesn't have any effect on the economy, many companies doing so might. And more significant than the effect of the wage increases are the cause of them: employers are beginning to feel the tighter labor market and are raising wages in an attempt to keep their good employers because other opportunities are opening up for them, and they want to keep them from leaving.
While the announcement that WalMart is going to raise the wage it pays to its lowest paid employees was met with a lot of media attention, the effect of such an increase on the economy is minimal if it is confined to one company. If enough companies follow suit, however, the hourly wage rate could finally start to increase, one of the last weaknesses in the labor market. As the labor market tightens, companies may start to raise wages in an effort to attract and retain the best employees.
Ask students, if the trend is that average hourly wage continues to increase only slightly and average hours worked continues to fall, which is more problematic for the economy? (hours worked falling because that denotes a drop in aggregate demand, a weakness in the economy).
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