Online Lesson

Focus on Economic Data: The U.S. Unemployment Rate - December 8, 2006

Key Economic Concepts:

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

Description:

Explore the connection between the economic indicators and real-world issues. These lessons typically can be done in one class period.

Current Key Economic Indicators as of May 19, 2010
Inflation	On a seasonally adjusted basis, the U.S. Consumer Price Index for All Urban Consumers (CPI-U) declined 0.1 percent in April, the U.S. Bureau of Labor Statistics reported today. Over the last 12 months, the index increased 2.2 percent before seasonal adjustment. (May 19, 2010)
Employment and Unemployment	U.S. non-farm 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, according to the "advance" estimate released by the Bureau of Economic Analysis. In the fourth quarter, real GDP increased 5.6 percent. (April 30, 2010)
Federal Reserve	The FOMC maintained the target for the federal funds rate at 0 to 1/4 percent, the target rate initially established in December, 2008. (April 28, 2010)

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The unemployment rate fell slightly to 4.5%.

Employment increased moderately. An increase of 132,000 jobs.

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 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.

Teachers' Notes

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.

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 (79 KB)
• PDF (36 KB)

Announcement s

The unemployment rate for the month of November was 4.5 percent. Total employment rose by 132,000 in November.

The original press release is available at: www.bls.gov/news.release/empsit.nr0.htm ^[1] .

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 defined as the number of individuals in the labor force. See the current calculation in Table 1.

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 not in the labor force, and therefore not counted in the unemployment rate.

        Description

Table 1: Calculation of the Unemployment Rate

Total civilian population		229,915,000		(excluding those under 16, members of the military, and persons in institutions)
- Not in Labor force		77,534,000		(retired, students, individuals choosing not to work)
= Labor force		152,381,000		(total population minus those not in labor force)
- Employed		145,564,000		(individuals with jobs)
= Unemployed		6,817,000		(individuals without a job and actively searching)

 

Unemployment Rate

=

6,817,000 145,564,000 + 6,817,000

=

4.5%

Note to teachers. The number of individuals employed actually differs here from the number of employed discussed later in the case. This is because the unemployment statistics and the number of employed used to calculate the unemployment rate come from different surveys than those used to track changes in the number of employed.

Have your students click here to complete an interactive activity.

Data Trends

Unemployment rates have fallen slowly throughout this year. Unemployment rates in 2005 averaged 5.1 percent. The year ended with an unemployment rate of 4.9 percent. The last three months have resulted in 4.7, 4.6, and 4.4 percent rates. These rates are significantly below the average rate of 5.5 percent in 2004.

The trends from the beginning of the 1990s to the 2001 recession were a decrease in unemployment rates and an increase in employment.

Figure 1 shows the rises in unemployment associated with the recession in 1990 to 1991 and the recession of 2001 with an almost decade long fall in unemployment in between. Unemployment rates continued to increase after the 2001 recession, as the economy only slowly recovered.

Unemployment rates, since reaching a high of 6.3 percent in June of 2003, have slowly and relatively steadily decreased.

Relevance of Unemployment Announcements

The 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.

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.

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 3.9 for adult males to 15.1 percent for teenagers.

Table 2: Unemployment Statistics by Gender, Race and Age
Adult Men	3.9%
Adult Women	4.0%
Whites	3.9%
Blacks	8.6%
Hispanics	4.9%
Teenagers	15.1%

Explanations of differences in unemployment rates among groups of individuals and parts of the country are differences in economic conditions, education levels, skills and experience, and discrimination.

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 important, perhaps even more important, indicators of progress in the economy. The failure of the economy to increase the number of jobs as rapidly as we experienced in the 1990s has been of particular interest and concern.

If employment does not increase at the same rate as population growth ultimately means the economy will experience higher unemployment or increasing numbers of individuals will leave the labor force.

Since the beginning of 2004, employment has been on an upward trend at rates that will provide sufficient jobs for new entrants and that trend has continued during November.

Total nonfarm payroll employment (seasonally adjusted) rose by 132,000 in November to more than 136 million jobs. This follows a revised rate of increase of 79,000 jobs in October.

Figure 3 shows that growth in employment slowed in the last part of 2000 and stopped in March of 2001. Employment decreased in all but six of the months from the beginning of the recession in March of 2001 to September of 2003. Finally in September of 2003, employment began to grow and had continued to grow since.

Figure 4 shows the monthly change in employment. The average monthly increase in jobs this year has averaged 149,000. If the same percentage of adults is to have jobs, employment needs to grow by approximately 125,000 per month.

Interactive Interpretation of Data

Often changes in unemployment rates can be confusing as workers' and potential workers' expectations change. See if you can determine the effects of the following events on unemployment rates.

Have your students click here to complete an interactive activity.

In each of these instances, the challenges of interpreting changes in unemployment rates under all conditions are significant. In both cases, the unemployment rate can move in a direction that may seem to be counterintuitive. The primary lesson to take away is to be cautious with data and the interpretation.

The Costs of Unemployment

There are significant personal costs to unemployment and these are the easiest to understand. Unemployed workers often do not have the income to support themselves or their families. The stress of being unemployed is reflected not only through the financial challenges of paying regular ongoing bills, but also 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 unemployment compensation provided to many unemployed workers. Because most workers pay the taxes that fund the unemployment compensation, the cost of being unemployed is spread among taxpayers, instead of having the entire burden fall on the unemployed workers alone.

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. Average standards of living are lower as a result of increases in unemployment.

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 those who are graduating and just entering the job market. Some frictional unemployment 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 levels of unemployment that economists consider to be the lowest possible sustainable levels (discussed below), the only unemployment that exists is due to friction in labor markets and structural changes in the economy.

Full employment

Economists define the approximate unemployment rate with no cyclical unemployment as full employment. If unemployment falls to level below the full employment rate, there will be upward pressure on wages and prices. If unemployment rises to a very high rate, there will downward pressure on wages and prices or wages and prices will remain steady. In the middle is a level, or more accurately, a range, where there is not pressure on wages and prices to rise or fall.

Economists do not know for certain what that rate or range is and even if they did, it does change over time. A consensus estimate is that the full employment rate of unemployment is currently between 4.0 and 4.7 or 4.8 percent of the labor force being unemployed.

Case Study Discussion Questions

Have students complete the two interactive exercises below.

Have students click here for the first interactive exercise.

[It can happen and did. If the labor force increases more slowly than normal because relatively few entrants come into the labor force for the month and a larger percentage of the new entrants are employed than normal, the unemployment rate will fall.]

Possible answers: 

1. It can happen and did. If the labor force increases faster than normal because more entrants come into the labor force for the month and a smaller percentage of the new entrants are employed than normal, the unemployment rate will rise.

2. The unemployment rate increased slightly to 4.5%. However, it remains relatively low. Employment increased by more than a sufficient amount to provide new entrants with jobs and has been doing so for some time.

3. Fiscal and monetary policies are difficult to determine in this case. (See the FOMC latest case study.) Employment growth is good but it is slowing when compared to the last two year. There is some worry that real GDP growth is slowing. These events might call for stimulative policies in the near future. However, increases in inflation may also be a problem. (See the latest inflation case study.) In addition, the unemployment rate is still relative low. These latter two conditions mean that policies should be neutral or restrictive.

We should also keep in mind that both policies have significant lags between the time we make a decision to do something and when the policy actually begins to have an effect. Thus, it is not really current conditions that are important, but what current conditions say about what future conditions are likely to be. Thus, we have to forecast future changes.

Links Used:

1. ^{^} "Economic News Release" - (www.bls.gov) This article discusses a summary of the employment situation for June 2010.

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