Focus on Economic Data: The Unemployment Rate, April 2001
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The unemployment rate for the month of April 2001 was 4.5 percent, two-tenths of a point increase from the March 2001 rate of 4.3%. The number of individuals employed decreased by 223,000.
An unemployment rate of 4.5 percent for April 2001 is the highest unemployment rate since October 1998, but still only slightly higher than the 3.9 to 4.3 percent range during 1999 and 2000. Prior to that, the unemployment rate had been in a steady decline since shortly after the last recession in 1990-1991.
It has been a most amazing trend. For almost ten years, unemployment has fallen and the number of employed persons has increased by more than 15 million.
However, in April 2001, the number of jobs decreased by 223,000, the largest absolute monthly decrease since 1991. Job losses were most prominent in the manufacturing sector (104,000 jobs), construction (64,000) and services (121,000). These losses were partially offset by employment increases experienced in the oil and gas extraction, the government and retail trade.
Average hourly earnings for production workers increased by 5 cents to $14.22 in April 2001. Over the past twelve months, average hourly earnings rose by 4.3% and average weekly earnings rose by 3.4% (as the number of hours worked by the average worker decreased).
The average monthly increase in employment was approximately 155,000 in 2000 and 220,000 in 1999. Growth in employment in 2000 was 1.9 million; in 1999, the increase in employment equaled 2.8 million.
Importance of the Changes
In newspapers and magazines, much is being written about the slowing growth in the U.S. economy. The references are to the slowing growth in spending and resulting cutbacks in production and in some cases employment. The result of that slowing growth is this month's increase in the unemployment rate, the overall decrease in employment, and the increasing unemployment among practically all groups of individuals.
In May of 1999, the Federal Reserve began a policy of slowing the rate of growth in the money supply and creating increases in short-term interest rates. That policy lasted through the Federal Reserve meeting on November 15, 2000. The goal was to slow the rate of growth in spending in the economy to be more in line with the growth in capacity. That policy has surely had an effect and evidence of that was the slower growth in real GDP in the last quarter of 2000 and the first quarter of 2001, a rise in unemployment from October through April, the slowing increase in the number of jobs, and now the actual decrease in jobs.
That restrictive policy changed with the December Federal Reserve meeting, after which the Federal Reserve announced that current "risks are weighted mainly toward conditions that may generate economic weakness in the foreseeable future." On January 3, January 31, March 20 and April 18, 2001 the Federal Reserve announced decreases in its target federal funds rate in response to further weakening in the economy. Clearly the Federal Reserve is concerned with rising unemployment and the increased possibility of a recession. (See the excerpts from the actual Federal Reserve reports below.)
For most of 2000, unemployment remained between 3.9 and 4.1 percent of the labor force. In the first three-quarters of 2000, the number of individuals in the labor force and the number of employed were increasing at a rate that many economists said could not be sustained without considerable inflationary pressures.
The growth in the labor force depends upon the growth of the working age population and increases in the percentage of that group willing to work. Projections are that the size of the group will continue to grow slightly more than one percent a year and that the percentage working will not increase significantly. Under those conditions, the sustainable monthly growth in jobs is about 155,000. The last three months of 2000 and all months during this year have shown growth in the labor force that is less than that sustainable growth rate.
Definition of the Unemployment Rate
The unemployment rate is the percentage of the U.S. labor force that is unemployed. It is calculated by dividing the number of unemployed individuals by the sum of the number of people unemployed and the number of people employed. An individual is counted as unemployed if the individual is over the age of 16 and is actively looking for a job, but cannot find one. Students, those individuals who choose to not work, and retirees are therefore not counted in the unemployment rate.
In April 2001:
Distribution of Unemployment
Unemployment varies significantly among groups of individuals and parts of the country. In April 2001, the unemployment rate increased the most for adult women and whites, and also posted moderate increases for all other races and sexes, except for blacks, which actually declined. Adult men had a slightly higher unemployment rate (4.0%) than adult women (3.8%), and whites have a lower rate (4.0 %) than blacks (8.2 %) and Hispanics (6.5 %). The teenage (16-19 year old) unemployment rate increased to 14.2 percent. Among teenagers, unemployment is highest for black males (34.9 %) and lowest among white females (10.8 %.)
Unemployment rates for states and cities are released with a greater lag than the national data. In March 2001, Connecticut had the lowest unemployment rate of 1.9%, followed by South Dakota at 2.2%, and Maine and North Dakota with a rate of 2.4%. The highest levels of unemployment were experienced by Alabama (5.8%), Washington (5.7%). Louisiana (5.6%), and the District of Colombia at (6.0%). But rates vary even more by city, Charlottesville, Virginia, Columbia, Missouri, Stamford-Norwalk, Connecticut and College Station, Texas all had unemployment rates of 1.4%, followed by Danbury, Connecticut (1.5%), Portland, Maine at 1.6% and Sioux Falls, South Dakota and Fayetteville, Arkansas at 1.8%. Among the highest rates in the country are Merced (17.1%) and Visalia/Tulare/ Porterville, California (18.5%). Of nine geographical areas of the country, New England had the lowest unemployment rate at 2.8 percent and the Pacific area had the highest with 4.8 percent.
The Costs of Unemployment
There are significant personal costs to unemployment. Unemployed workers often do not have the income to support themselves or their families. The stress of being unemployed is reflected through increases in alcohol and drug abuse, marital problems, and criminal activity among those who are unemployed.
State and federal governments reduce the personal financial cost of being unemployed through the unemployment compensation provided to unemployed workers.
Increases in unemployment also mean that the economy is wasting an important scarce resource - labor. Real GDP is less than it otherwise could be and that additional output is lost forever. If more individuals had been employed, production of goods and services would have been higher.
NAIRU Level of Unemployment
Economists, journalists, and the staff of the Federal Reserve often refer to the Non-Accelerating Inflation Rate of Unemployment (NAIRU). While there are some technical and potentially significantly differences, other terms like full employment, high employment, and the natural level of unemployment are used almost interchangeably to refer to the same relative economic conditions.
When unemployment is quite low, businesses will tend to bid up wages and then increase prices. At higher rates of unemployment, the upward pressure on wages does not exist and inflation may even decrease. The line (actually a range of unemployment) between acceleration and deceleration is the amount of unemployment at the NAIRU. Unfortunately, the rate changes and we do not know its level until we are already experiencing inflationary pressures.
We also describe unemployment as having reached the full-employment rate of unemployment at NAIRU. What that really means is that the only unemployment that exists is due to friction in labor markets and structural changes in the economy. Frictional unemployment is unemployment resulting from individuals quitting jobs and looking for new ones, people getting fired and quickly finding new jobs, and students graduating and looking for jobs. It is normal in the sense that even in very good times, people will find jobs soon, and there will be a small number at any one time. There may be some individuals whose skills simply do not match any available openings and it may be a lengthy time before they are able to find positions. That is described as structural unemployment.
If the only causes of unemployment are frictional and structural, that is, if the economy is at full employment, an expansion in hiring will tend to put upward pressure on wages and eventually prices.
Unemployment Case Studies
Natasha graduated from the University of California with a degree in political science. As a feminist, she wanted to work as a political activist for women's rights. However, she is currently working part time as a paralegal and is considering going to law school in order to improve her credentials. If she did not take the part-time job and continued to look for work, she would be counted as unemployed. If she enrolls in law school and stops looking for a job, she will not be counted as employed or unemployed. Now she is included in the labor force and counted as employed.
Sam was a highly paid executive working in a bank. When the bank merged with an out-of-town bank, he was fired. He has decided to take some time off to relax and regroup before he begins to search for a new job. Sam is not counted as unemployed, even though he no longer has a job. He is not actively looking for work and therefore is not in the labor force. Once he starts looking, he will be included in the labor force and initially be counted as unemployed.
Jamie graduated from the State University of New York with a degree in education. She applied to be a teacher, however, those jobs do not start until the fall. Despite her credentials, the only temporary job she could find in the summer was as a ride operator at an amusement park. If she did not take the summer job and continued to look for a job, she would be counted as unemployed. However, since she is working, even at the low-wage job she does not really want, she is counted as employed.
Natasha and Jamie are working out of necessity; they are college graduates who cannot find the job they want and in order to pay the rent are forced to take jobs that do not match their skill levels. Many people end up working part time or at jobs in which they do not fully use their skills while they search or wait for a better, full-time job. Some are discouraged by the searching and end up going back to school in order to increase their education levels. Those are not counted as unemployed or in the labor force. However, as long as people as working, they are counted as employed, despite the situation.
Federal Reserve Board Actions
The Federal Reserve's report on economic conditions across the country is released in the "Beige Book" prior to each meeting of the Federal Reserve Open Market Committee. The following is an excerpt from the Beige Book released on May 2, 2001, in preparation for its meeting on May 15, 2001.
"While some districts still mention that labor markets are tight, almost all note that this tightness has been easing, especially in the manufacturing sector. Most contacts in the Atlanta, Boston, Chicago, Kansas City and St. Louis districts have commented that filling vacancies has become easier. The Dallas district, however, reports that quality workers are still elusive, and construction workers are still in short supply in the Chicago and Kansas City districts. Skilled workers in the energy sector are also in short supply in the Kansas City district. The New York district notes a continuing backlog of demand for workers in the financial services industry, though this has become less pronounced in recent weeks. Employment in the St. Louis district's retail trade and service sectors are picking up because of strengthening demand."
"Upward wage pressures have generally abated. Wages are rising very moderately or are unchanged in most parts of the country except the Richmond and San Francisco districts, where scattered wage increases are noted."
On January 3, January 31, March 20, and April 18, the Federal Reserve's Open Market Committee decided to lower the target federal funds rate by one-half percent. The discount rate was also lowered each time. Below is an excerpt from their April 18, 2001 meeting.
"The FOMC has reviewed prospects for the economy in light of the information that has become available since its March meeting. A significant reduction in excess inventories seems well advanced. Consumption and housing expenditures have held up reasonably well, though activity in these areas has flattened recently. Although measured productivity probably weakened in the first quarter, the impressive underlying rate of increase that developed in recent years appears to be largely intact."
"Nonetheless, capital investment has continued to soften and the persistent erosion in current and expected profitability, in combination with rising uncertainty about the business outlook, seems poised to dampen capital spending going forward. This potential restraint, together with the possible effects of earlier reductions in equity wealth on consumption and the risk of slower growth abroad, threatens to keep the pace of economic activity unacceptably weak. As a consequence, the Committee agreed that an adjustment in the stance of policy is warranted during this extended inter-meeting period."
"The Committee continues to believe that against the background of its long-run goals of price stability and sustainable economic growth and of the information currently available, the risks are weighted mainly toward conditions that may generate economic weakness in the foreseeable future."
In the three earlier announcements, warnings were issued regarding the concerns of the Federal Reserve.
On March 20: "Although current developments do not appear to have materially diminished the prospects for long-term growth in productivity, excess productive capacity has emerged recently. The possibility that this excess could continue for some time and the potential for weakness in global economic conditions suggest substantial risks that demand and production could remain soft. In these circumstances, when the economic situation could be evolving rapidly, the Federal Reserve will need to monitor developments closely."
On January 3: "These actions were taken in light of further weakening of sales and production, and in the context of lower consumer confidence, tight conditions in some segments of financial markets, and high energy prices sapping household and business purchasing power. Moreover, inflation pressures remain contained. Nonetheless, to date there is little evidence to suggest that longer-term advances in technology and associated gains in productivity are abating."
On January 31: "Consumer and business confidence has eroded further, exacerbated by rising energy costs that continue to drain consumer purchasing power and press on business profit margins. Partly as a consequence, retail sales and business spending on capital equipment have weakened appreciably. In response, manufacturing production has been cut back sharply, with new technologies appearing to have accelerated the response of production and demand to potential excesses in the stock of inventories and capital equipment.
"Taken together, and with inflation contained, these circumstances have called for a rapid and forceful response of monetary policy."
- What are the key parts of the unemployment announcement?
- What are the relevant economic concepts?
- What does this mean for workers? What does this mean for employers?
- How will the Federal Reserve decision-makers likely react?