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 February, 2015, reported March 6, 2015. The lesson focuses on different ways of measuring the demand for labor and how the demand for labor affects the average hourly wage rate, one of the measures used by the Federal Reserve to gauge the health of the labor market.

KEY CONCEPTS

Demand, Employment, Employment Rate, Labor, Labor Force, Salaries, Unemployment, Unemployment Rate, Wage

STUDENTS WILL

  • Examine the latest BLS report on unemployment and identify those sectors that experienced the greatest gains in employment.
  • Explore various measures of the demand for labor.
  • Discuss the implications of these measures.
  • Analyze the trends in average hourly wage.

Current Key Economic Indicators

as of March 7, 2015

Inflation

The Consumer Price Index for All Urban Consumers (CPI-U) declined 0.7% in January on a seasonally adjusted basis. Over the last 12 months, the all-items price index fell 0.1%, the first 12-month negative change since the period ending October 2009. The gasoline index fell 18.7% and was the main cause of the decrease in the seasonally adjusted all items index. Core inflation rose 0.2% in January.

Employment and Unemployment

The unemployment rate fell to 5.5% in February of 2015, according to the Bureau of Labor Statistics release of March 6, 2015. Total nonfarm employment rose by 295,000. Job gains were particularly strong in food services and drinking places, professional and business services, and construction. Manufacturing employment also increased, although not as much as last month.

Real GDP

Real GDP increased 2.2% in the fourth quarter of 2014, according to the revised estimate released by the Bureau of Economic Analysis. This estimate is 0.4 percentage points less than the advance estimate. Consumer spending rose 4.2%, along with business investment, exports, and state and local government spending. Offsetting these gains were increases in imports and decreases in federal government spending.

Federal Reserve

In its January 28, 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 and other "transitory" effects diminish. The statement reaffirmed the FOMC intention to keep the federal funds rate at its current low level. Notably, the FOMC added international variables to its list of factors to monitor for the timing of a rate increase.

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.

The lessons explores indications of labor demand, how that demand influences the wage, and how the wage has changed over the course of the recovery.

RESOURCES


PROCESS

  1. Direct students to the latest BLS news release on employment for February, 2015.

    Ask students what the change in nonfarm employment was (it increased by 295,000). What was the average monthly change in employment over the past 12 months? (266,000 new jobs).  

    Ask students what the unemployment rate for February was (5.5%). Ask how this compares to the unemployment rate reported last month (it's 0.2 points less than the rate in January). 
  2. Ask students what industry sectors experienced the greatest gains in employment (food service and drinking places, professional and business services, construction)
  3. Ask students what a high unemployment rate implies about the demand and supply of labor  (high unemployment implies that the supply of labor is higher than the demand).  Using this same framework of demand and supply, ask students what happens when people become discouraged and drop out of the labor market (if people drop out of the labor market, the supply of labor decreases).  
  4. Ask students what the increases in the employment numbers and a falling unemployment rate imply about the demand and supply of labor (demand for labor is increasing). Tell students that the unemployment rate is just one way to measure the demand for labor--there are many more.

    vacancy and hire rates
  5. Explain to students that the vacancy rate is the percentage of jobs that are vacant, compared to the total number of jobs that exist (both filled and vacant). The hires rate is the percentage of those employed who were added in the past month. Draw students' attention to the fact that these rates tend to move together: if the percentage of jobs that are vacant increases, we would expect that the hiring rate would also increase.

    Draw students' attention to the portion of the graph that represents from Jan. 2012 and onward. Ask what they notice about the graph that is different from the previous time periods (they should say that the vacancy and hires graphs are getting closer together). Ask what that implies about the demand for labor (because the vacancy rate is increasing and very close to the hires rate, the demand for labor is increasing).

    vacancy graph
  6.  Tell students to look at this graph, another measure of the demand for labor. This graph represents the proportion of job openings to the number of unemployed. For example, a proportion of 50 means that there is one job opening for every 2 people who are unemployed. Ask what the notice about this graph (the V/U ratio fell during the recession but has been increasing since).

    Ask what this trend indicates for the demand for labor (if the ratio is getting larger, it means that there are fewer unemployed for each job opening, again, indicating that the demand for labor is increasing). 
  7. Tell students to imagine that they have a job, and their boss calls them in and tells them that they've been doing great, he/she is happy with their performance, and has decided to give them a raise. Ask how many students would be happy about that (everyone should raise their hand). Tell students to go back to the Employment Report and find how much average hourly wages increased for February (3 cents). Ask how many would be happy with that raise (probably no one will raise their hand).

    Tell students that over the 12 month period ending in February, the average hourly wage increased by 49 cents. Ask if they would be happy with that raise (answers will vary). 
  8. Tell students that even though the unemployment rate is decreasing, workers' wages haven't increased as much as we might expect them to, given several measures of increased labor demand. 



    Ask students what they notice about this graph (the rate of increase for average hourly earnings declined during the recession, has not rebounded back to pre-recession levels and has evened out at around 2%). Point out that with inflation running at 2% or slightly below, average hourly earnings, adjusted for inflation, have virtually been stagnant.

    Tell students that there are many explanations for this, and one of them appears in this graph. Ask students what happened to wages during the recession and immediately after (they increased less). Make sure students understand that wages didn't fall--the rate of increase fell. Ask what the graph would have looked like if wages had actually fallen (the graph would have gone below 0 on the vertical axis). Ask, given what they know about the demand and supply of labor, is that a predictable outcome (they should say that, given the high unemployment rate, wages should have fallen, so this wasn't a predictable outcome). 

ASSESSMENT ACTIVITY

CONCLUSION

There are several indications that the demand for labor has increased, the unemployment rate being just one. This lesson explores those measures and discusses the implications for the increase in the demand for labor in terms of wages. Finally, recent trends in wages are examined to see if they match what we would expect given the labor demand discussion.

EXTENSION ACTIVITY

Ask students why they think wages didn't fall (in nominal terms) during the recession when the law of demand suggests that they should have (answers will vary). Tell students that Federal Reserve Chairperson Janet Yellin has suggested that the reason wages are not increasing during this period of falling unemployment is that wages didn't fall during the recession. Employers may not have wanted to cut salaries during the recession for fear of hurting worker morale. Now that we are continuing to improve, employers' perception is that workers are overpaid, so they didn't feel they had to increase wages when the recovery began. Now that demand is increasing further, wages will probably begin to rise soon. (Note: this is called the pent-up wage deflation theory). 

EDUCATOR REVIEWS