Online Lesson

Focus on Economic Data: The Unemployment Rate - June 2003

Key Economic Concepts:

• Deflation
• Economic Growth
• Economic Institutions
• Inflation
• Productivity
• Tools of the Federal Reserve

Description:

The unemployment rate fell from 6.4 percent in June to 6.2 percent in July. Slightly over 9 million individuals were unemployed.

Current Key Economic Indicators as of May 14, 2010
Inflation	On a seasonally adjusted basis, the CPI-U rose 0.1 percent in March after being unchanged in February. The index for all items less food and energy was unchanged in March after rising 0.1 percent in February. (May 14, 2010)
Employment and Unemployment	Nonfarm payroll employment rose by 290,000 in April, the unemployment rate edged up to 9.9 percent, and the labor force increased sharply. Job gains occurred in manufacturing, professional and business services, health care, and leisure and hospitality. Federal government employment also rose, reflecting continued hiring of temporary workers for Census 2010. (May 7, 2010)
Real GDP	U.S. real gross domestic product increased at an annual rate of 3.2 percent in the first quarter of 2010, (that is, from the fourth quarter to the first quarter). In the fourth quarter, real GDP increased 5.6 percent. (April 30, 2010)
Federal Reserve	The FOMC will maintain the target range for the federal funds rate at 0 to 1/4 percent and continues to anticipate that economic conditions, including low rates of resource utilization, subdued inflation trends, and stable inflation expectations, are likely to warrant exceptionally low levels of the federal funds rate for an extended period. (April 28, 2010)

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Announcement

The unemployment rate for the month of June was 6.4 percent, an increase from the 6.1 percent in May. Total employment fell by 30,000 in June.

The original press release is available at: www.bls.gov/news.release/pdf/empsit.pdf. ^[1]

[NOTE: Material in italics in this case does not appear in the student version. Each case describes the most current data and trends and expands expectations of student understanding. In this case, the relation among employment, wages, and inflation is introduced, along with definitions of frictional, structural, and cyclical unemployment.]

You may wish to use the following larger versions of the graphs and tables from this lesson for overhead projection or handouts in class:

• PowerPoint (181KB)
• PDF (44KB)]

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. The number of people unemployed and the number of people employed is the number of individuals in the labor force. 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.

        Description

Table 1: Calculation of the Unemployment Rate

Total civilian population		221,014,000		(excluding those under 16, members of the military, and persons in institutions)
- Not in Labor force		73,918,000		(retired, students, individuals choosing not to work)
= Labor force		147,096,000		(total population minus those not in labor force)
- Employed		137,738,000		(individuals with jobs)
= Unemployed		9,358,000		(individuals without a job and actively searching)

 

Unemployment Rate

=

9,358,000 137,738,000 + 9,358,000

=

6.4%

Relevance of Unemployment Announcements

The monthly unemployment announcements receive headline treatment almost every month. Changes are significant indicators of national economic conditions and have relevance to every local community as unemployment has significant costs to the individuals who are unemployed and to the entire community and the U.S. economy. Those costs are explored in this case study.

Changes in levels of employment are also included in the announcements and often receive less attention. However, the employment data are equally, perhaps even more, important indicators of the direction of the U.S. economy.

Recent announcements have received particular attention as employment continues to fall and unemployment has increased. Discussion in the press will focus on whether the U.S. economy continues in a very slow growth pattern and whether or not something should be done by the federal government or Federal Reserve.

Goals of the Unemployment Case Study

The purpose of this case study is to report the unemployment and employment data, to provide interpretations of the significance of the changes in conditions, and to discuss a number of related economic concepts. The case study includes additional data on the distribution of unemployment, definitions of unemployment and the costs of unemployment. The causes of unemployment are presented along with discussion of possible alternative policies. The case ends with exercises for students and activities that teachers can use in classrooms.

The case offers an opportunity to enhance our understanding of the relevance of the announcements and the causes and consequences of one of the more important challenges economic policymakers face.

Data Trends

The trend over the 1990s, since the recession in 1990-1991, has been a decrease in unemployment and an increase in employment. In 1999 and 2000, annual growth in employment was 2.8 million people, with approximately 155,000 more people employed each month. That trend added employment of over 15 million people during the last decade.

At its low in December 2000, unemployment equaled 3.9 percent. Since March 2001, the trend has generally been one of increasing unemployment and decreasing employment. The unemployment rate in June (6.4 percent) increased from the previous month’s rate of 6.1 percent. The 6.4 percent is a nine-year high.

Total non-farm payroll employment (seasonally adjusted) fell by 30,000 in June to 130 million. The largest job decline in June occurred in manufacturing, with a relatively small decline in retail trade employment. Construction and services employment increased slightly.

Over the past 2 years, government employment has trended upward, while private sector employment trended downward, with particularly large falls in manufacturing employment. Recently, budget problems have lowered the rate of job growth in state and local governments.

Importance of the Changes

In newspapers and magazines and on television news, much has been written and said about the slowing growth in the U.S. economy and rising unemployment. The references are to the slowing growth in consumer spending, falling investment spending, and resulting cutbacks in production and employment. The increase in the unemployment rate from 3.9 percent to the current 6.4 percent, as well as the decrease in the number of people employed, are the results of those changes in spending.

Employment reached a peak in March 2001. We have lost more than 2.5 million jobs since then.

Distribution of Unemployment

Unemployment varies significantly among groups of individuals and parts of the country. Table two shows the unemployment rates for a number of groups of individuals, with unemployment rates ranging from 5.2 for adult women to 19.3 percent for teenagers.

Table 2: Unemployment Statistics by Gender, Race & Age

Adult Men			6.1%
Adult Women			6.1%
Whites			5.5%
Blacks			11.8%
Hispanics			8.4%
Teenagers			19.3%

 

In Table 2, compare the unemployment rate for teenagers to the unemployment rate for adults. Why are these rates different? [There are a number of explanations for the unemployment rate differentials between teenagers and adults. Many jobs require a degree of education, skill, and experience that teenagers lack. Education and experience measure the amount of what economists call human capital. Most adults possess more human capital than teenagers because they have attended college and professional schools, have been trained in a particular field, and have job experience. The degree of specialization and increased knowledge in a field, not to mention an understanding of the demands of many workplaces, will tend to make an adult worker more productive than a teenager. When an employer is hiring workers, the employer most often attempts to hire the most productive candidate, which is often the more educated and more skilled worker. Therefore, adults are preferentially hired over teenagers, an event that leads to adults having a lower unemployment rate than teenagers.]

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 many unemployed workers. Government spending is funded, in the largest part, from tax revenues. Therefore, unemployment compensation spreads out the cost of being unemployed among taxpayers, instead of having the entire burden fall on the unemployed worker.

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.

Employment

A second important part of each month’s unemployment announcement is the report of the number of individuals employed. Unemployment and unemployment rates receive much of the press attention and rightfully so. But employment and a loss or gain in jobs are also essential indicators of progress in the economy.

The unemployment and employment even show different trends in some cases. For example, in some months, a falling unemployment rate was accompanied by a slight fall in employment. How can the number of individuals employed fall and the unemployment rate fall at the same time?

This must mean that the number of individuals unemployed fell also. Most likely, what has happened is that some unemployed individuals became discouraged and are no longer looking for work. Many of those individuals may have simply given up on finding a job in the near future. If people lose their jobs and leave the labor force in sufficient numbers, they also are not counted as unemployed. If both events happen, the unemployment rate can fall at the same time the number of individuals with jobs actually decreases.

In many of recent months the labor force has actually declined as some of the newly unemployed dropped out of the labor force and many who would normally enter the labor force have not.

The unemployment data and the employment data are actually derived from two different surveys. It is possible for some inconsistencies to arise from time to time.

Figure 3 shows that growth in employment slowed in 2000 and stopped in March of 2001. Employment actually decreased in all but one of the months of 2001, all but four in 2002, and all but January in 2003. (See figure 4.) As growth in spending has slowed and actually decreased in the first three quarters of 2001, businesses reduced their labor forces. (See the most recent GDP case study.) A sustained fall in employment is one of the measures economists use when determining the existence of a recession and indeed reached a peak just before the beginning of the current recession.

The Labor Force

The labor force increased by more than 600,000 individuals during June. This rather large increase in the number of individuals looking for work combined with a fall in employment caused the significant increase in the unemployment rate.

Can you describe why some newspapers might describe that as a favorable event? [A change in the labor force does change the unemployment rate. If individuals drop out of the labor force because they become discouraged and do not believe that they can find jobs, the unemployment actually understates the true rate of employment. In this case, an increase in individuals entering the labor force may imply that individuals are becoming more optimistic about future conditions and if they are accurate may be a sign of better things to come. Thus the increase in the unemployment rate may not be as bad as it seems.]

Employment, Wages And Inflation

In June 2003, average hourly earnings for private sector increased 3 cents $15.38. Average weekly earnings increased by $1.01 in April to $518.31 as average weekly hours stayed constant.

To a worker, wages represent income and a quantity of goods and services that can be purchased as a result of an hour’s labor. To employers, wages represent the cost of an input. An employer usually has additional costs of labor such as supplements, benefits and insurance plans.

If companies were expanding the number of workers, the pool of available workers becomes smaller and unemployment decreases. Competition among companies forces wages up as companies offer higher wages in order to attract workers to their firm. These increased wages are an increased cost of production and if these costs are passed on to the consumer in the form of higher retail prices, they represent inflationary pressures in the economy.

When the economy enters an economic slowdown, companies cut back on production and on the number of people employed. As workers are laid off, the pool of available workers increases. When unemployment increases, the upward pressure on wages and the price level are reduced.

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.

The amount of unemployment at the NAIRU level is difficult to quantify, primarily because the rate changes and we do not know its level until the economy is experiencing inflationary pressures. Therefore, the NAIRU level is better thought of as actually a range of unemployment levels at which the price level remains stable. Above and below this range, the economy will experience acceleration and deceleration of prices changes.

Types of Unemployment

There are three types of unemployment, each of which describes the particular circumstances of the individual and their employment situation. Frictional unemployment is temporary unemployment arising from the normal job search process. Frictional unemployment helps the economy function more efficiently as it simply refers to those people who are seeking better or more convenient jobs and will always exist in any economy.

Structural unemployment is the result of changes in the economy caused by technological progress and shifts in the demand for goods and services. Structural changes eliminate some jobs in certain sectors of the economy and create new jobs in faster growing areas. Persons who are structurally unemployed do not have marketable job skills and may face prolonged periods of unemployment, as they must often be retrained or relocate in order to find employment.

Cyclical unemployment is unemployment caused by a drop in economic activity. This type of unemployment can hit many different industries and is caused by a general downturn in the business cycle.

At the NAIRU level of unemployment discussed above, the only unemployment that exists is due to friction in labor markets and structural changes in the economy.

Case Study

1. What are the key parts of the unemployment announcement?
   
   [The unemployment rate increased to 6.4%. Employment decreased once again this month. Hourly and average wages increased slightly this month.]
   
2. What are the relevant economic concepts?
   
   [Rate of unemployment and change in labor force.]
   
3. What does this mean for workers?
   
   [Hourly earnings increased slightly. Given that the labor force is increasing, some potential workers may be more optimistic about the possibility of finding a job.]

Additional Questions

1. If 100,000 individuals lose their jobs in a month and all of them drop out of the labor force, what happens to the unemployment rate?
   
   [If 100,000 individuals lose their jobs in a month and all of them drop out of the labor force, what happens to the unemployment rate?]
   
2. If productivity (output per worker) increases by three percent in a year, real GDP rises by two percent, and the labor force increases by one percent, what happens to unemployment?
   
   [Unemployment increases by approximately two percent. To some extent this is currently happening. As the labor force grows through population growth, real GDP has to go if new workers are to find jobs. In this case, fewer workers are actually needed as spending is growing more slowly than productivity. One percent fewer workers are needed to produce the new level of real GDP (two percent – three percent). Plus an additional one percent of the labor force enters.]
   
3. What is the most important cost of unemployment?
   
   [There is not necessarily a correct answer here. Obviously if it is you or a member of your family who is unemployed, the cost is great to you. Some of that cost is borne by unemployment compensation. But even if unemployment does not directly affect you, our economy is losing output that we could have had and thus we are not as well-off as we could possible be.]
   
4. Why are changes in levels of employment just as important as changes in unemployment?
   
   [Growth in employment is one sign that businesses are expanding production and sales. In addition, as the population grows, it is likely the labor force will also grow. Without an increase in employment that equals the growth in the labor force, unemployment will eventually increase.]

Classroom Discussion Activity

Go to the BLS website and check the Local Area Unemployment Statistics for your city and state (www.bls.gov/news.release/metro.t01.htm ^[2] ).

1. Is unemployment in your area higher, lower, or roughly the same as the national average?
2. What factors contribute to your area's unemployment rate?
3. Which industries have expanded?
4. Which industries have contracted?
5. Will the recent changes affect you?

Links Used:

1. ^{^} "The Employment Situation" - (www.bls.gov) This BLS page provides current employment situation press releases from the U.S.
2. ^{^} "Civilian Labor Force and Unemployment by State and Metropolitan Area" - (www.bls.gov) This BLS page provides labor force and unemployment data by state and metropolitan area.

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