Students explore the concept of unemployment and the unemployment rate by examining current unemployment statistics and a wide range of backgound material. Specific topics include: the formal definition of the unemployment rate, current and historical unemployment rate statistics, interpretation of those statistics, an examination of the demographic breakdown of unemployment at different periods of time, the economic causes of unemployment, and possible actions the Federal Reserve Board can take in response to unemployment within the country.
Current Key Economic Indicatorsas of May 5, 2013
On a seasonally adjusted basis, the Consumer Price Index for All Urban Consumers decreased 0.2 percent in March after increasing 0.7 percent in February. The index for all items less food and energy rose 0.1 percent in March after rising 0.2 percent in February.
Total nonfarm payroll employment rose by 165,000 in April, and the unemployment rate was little changed at 7.5 percent. Employment increased in professional and business services, food services and drinking places, retail trade, and health care.
Real gross domestic product increased at an annual rate of 2.5 percent in the first quarter of 2013 (that is, from the fourth quarter to the first quarter), according to the "advance" estimate released by the Bureau of Economic Analysis. In the fourth quarter, real GDP increased 0.4 percent.
To support continued progress toward maximum employment and price stability, the Committee expects that a highly accommodative stance of monetary policy will remain appropriate for a considerable time after the asset purchase program ends and the economic recovery strengthens. In particular, the Committee decided to keep the target range for the federal funds rate at 0 to 1/4 percent and currently anticipates that this exceptionally low range for the federal funds rate will be appropriate at least as long as the unemployment rate remains above 6-1/2 percent...
The unemployment rate for the month of September 2001 was 4.9 percent, unchanged from August 2001. The number of individuals employed decreased by 199,000.
The original press release is available at: www.bls.gov/news.release/empsit.nr0.htm .
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 economy. Those costs are explored in this case study.
Changes in levels of employment are also included in the announcements and are equally important indicators of the direction of the U.S. economy.
Goals of the Unemployment Case Study
The purpose of this case study is to report the unemployment and employment announcement, 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 and 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.
You may wish to use the following files for overhead projection or handouts in class
The unemployment rate in September was unchanged from August when it increased sharply from the 4.4% to 4.5% range that it had hovered around since April of this year. This is the highest unemployment rate since September 1997.
Since the last recession in 1990-1991, unemployment had been in a steady decline. In 1999, total growth in employment was 2.8 million people. In 2000, employment grew by an additional 2.8 million people, at approximately 155,000 more people employed each month. During the first quarter of 2001, employment was still growing with 220,000 more people employed each month. These recent additions were part of a trend which added employment of over 15 million more people during the last decade.
A year ago, unemployment fell to a low of 3.9 percent, one percent less than it is this September. In April 2001, the unemployment rate began to increase and 323,000 jobs were lost between April and August. In September 2001, the number of jobs decreased by another 199,000. This was the largest job loss since February 1991. Job losses were most prominent in the manufacturing sector (93,000 jobs) and services (41,000). These losses were partially offset by employment increases experienced in finance, insurance and real estate (14,000).
The U.S. Department of Labor reported that these changes do not include the potential effects of the terrorists' attacks of September 11. The September data were either collected before September 11 or count individuals as employed if they were employed at any time during the pay period in which September 11 happens to fall. The effects should begin to be included in the October data, although the Department of Labor reports that they may not be able to identify the specific direct or indirect effects as opposed to the consequences of general economic conditions.
Importance of the Changes
Unemployment remained essentially unchanged this month, despite the largest job loss in a decade. In newspapers and magazines and on television news, much has been written and said about the slowing growth in the U.S. Economy The references are to the slowing growth in spending and resulting cutbacks in production and employment. The rapid increase in the unemployment rate from 4.5 to 4.9 percent during August and the decrease in the number of people employed this month are one result of slowing growth in spending.
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 restrictive monetary 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 and thereby eliminate potential inflationary pressures. During the last two quarters of 2000, the growth in real GDP began to slow, unemployment rose from October 2000 to October 2001, and the increase in the number of jobs was smaller.
The restrictive policy changed with the December 2000 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." The Federal Reserve then began to respond to slowing spending growth and the increasing potential for a recession by reducing the target federal funds rate by 400 basis points (4.0%) from January 2001 to October 2001.
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.
135,181,000 + 7,009,000
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 4.3 to 30.3 percent.
|Table 2: Unemployment Statistics by Gender, Race & Age|
Unemployment rates for states and cities are released with a greater lag than the national data. In August 2001, North Dakota had the lowest unemployment rate of 2.7%, followed by South Dakota at 2.8%, and Virginia with a rate of 2.9%. The highest levels of unemployment were experienced in Oregon (6.3%), the District of Columbia (6.4%), and Alaska (6.7%). But rates vary even more by city. Fargo, ND and Sioux Falls, SD had the lowest unemployment rate of 1.6%, followed Madison, WI and Columbia, MO (1.8%), and Portland, ME (1.9%). Among the highest rates in the country are Fresno, CA (9.9%), Visalia/Tulare/ Porterville, CA (12.7%) and McAllen/Edinburg/Mission, TX (12.8%). Of the nine geographical areas of the country identified by the Department of Labor, the area including Iowa, Kansas, Minnesota, Missouri, Nebraska, North Dakota, and South Dakota had the lowest unemployment rate at 3.5 percent and the region including Washington, Oregon, California, Alaska and Hawaii had the highest with 5.4 percent.
|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, which 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 part, from tax revenues. Therefore, unemployment compensation spreads out the cost of being unemployed among tax payers, 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.
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 is also a essential indicator of progress in the economy. The two pieces of data even show different trends in some cases. The headlines describing this month's announcement will report a constant unemployment rate combined with a significant fall in employment. (What that means is that those individuals who lost their jobs are not actively looking for new employment. Some actually may be waiting to be called back to their original positions.)
Figure 3 shows that growth in employment started to slow in the middle of 2000 and has actually decreased in two months in 2000 and in four of the last six months. As growth in spending has slowed and perhaps even become negative in the current quarter, businesses have reduced their labor forces. A sustained fall in employment is one of the measures economists use when determining the existence of a recession. Economists have not agreed upon whether we have reached that point.
Employment, Wages and Inflation
In September 2001, average hourly earnings for production workers increased by 3 cents to $14.44. 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 worked decreased).
To a worker, wages represent a quantity of goods and services that can purchased by an hour's labor. To employers, wages represent the cost of labor. In addition to wages 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.
Another common, sometimes confusing, term is the full-employment rate of unemployment. What that really means is that the only unemployment that exists is due to friction in labor markets and structural changes in the economy. Examples of frictional unemployment are 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.
Federal Reserve Board Actions
The Federal Reserve's report on economic conditions across the country is released in the "Beige Book" (named for its beige cover) two weeks prior to each meeting of the Federal Reserve Open Market Committee. The following are excerpts from the Beige Book released on September 19, 2001, in preparation for the Open Market Committee meeting on October 2, 2001.
"Reports from Federal Reserve Districts generally indicated that overall economic activity remained sluggish in August and early September, with several suggesting that activity slowed further. Upward price pressures were again restrained in nearly all Districts. Input cost pressures were said to be easing as well.
"Labor markets continued to ease in most parts of the country in August with over half the District reports suggesting soft and/or softening demand for labor. Boston and St. Louis indicated that demand for high-tech workers continued to erode, while Atlanta suggested that potential employers had become much more selective and high-tech job searches had become longer. There were scattered reports of moderately increasing wages but, for the most part, upward wage pressures continued to ease along with labor demand. In fact, the Cleveland report suggested that unions were trading off negotiated wage increases in exchange for job security provisions. Contacts in four Districts expressed concern over rising health insurance costs, while those in the Atlanta and Chicago regions also noted rising liability insurance costs."
Between January and October 2001, the Federal Reserve's Open Market Committee decided to lower the target federal funds rate 9 times, for a total decrease of 4.0% in the target federal funds rate. The discount rate was also lowered each time. Below is an excerpt from their October 2, 2001 meeting press release.
"The terrorist attacks have significantly heightened uncertainty in an economy that was already weak. Business and household spending as a consequence are being further damped. Nonetheless, the long-term prospects for productivity growth and the economy remain favorable and should become evident once the unusual forces restraining demand abate.
"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."
The original press release is available at: www.federalreserve.gov/newsevents/default.htm
What are the key parts of the unemployment announcement?
[The unemployment rate remained unchanged in September after increasing from 4.5 to 4.9 percent in August. The growth in the number of jobs had been slowing late last year and in the early part of 2001. The number of jobs actually decreased this month, for the fourth time in the last six months. Hourly wages increased slightly. There are many news reports of individual companies laying off workers, slowing growth in sales of retail companies, and continuing falling employment in manufacturing.]
What are the relevant economic concepts?
[Rate of unemployment; growth in labor force; the NAIRU level of real GDP; and inflation.]
What does this mean for workers?
[Hourly earnings showed modest increases in most of the country. Unemployment is still low compared to most of the 1990s, but it is becoming more difficult for many individuals to find employment. The rate of growth in real GDP is slowing and employment is decreasing.]
What does this mean for employers?
[Pressures on the labor market have eased significantly over the past 12 months. In most sectors of the economy, it is no longer difficult for employers to hire workers and therefore the upward pressures on wages are abating.]
How will the Federal Reserve decision-makers likely react?
[The Federal Reserve can increase, decrease, or not change the target federal funds rate. (The federal funds rate is the interest rate banks charge one another for short-term loans of reserves. The target is the goal the Federal Reserve sets as appropriate, given its monetary policy intentions.)
Decreasing the target federal funds rate would likely increase the rate of growth in investment and consumption spending and result in expanded employment (and increase inflationary pressures and decrease unemployment).
Increasing the target federal funds rate would likely decrease the rate of growth in investment and consumption spending. A decrease in growth in spending would be intended to reduce rates of increases in wages and prices, slow the growth in employment, and perhaps increase unemployment.
At the November 2000 meeting, the Federal Reserve was concerned with potential inflation and stated that it was leaning toward increasing interest rates in the future. In December, however, the Federal Reserve was much more concerned with the smaller increases in spending and the potential of decreases in spending and a resulting increase in unemployment. That concern was the basis for the decreases in interest rates announced between January and October 2001.]
Go to the BLS website and check the Local Area Unemployment Statistics for your city and state (www.bls.gov/lau/home.htm ).
- Is unemployment in your area higher, lower, or roughly the same as the national average?
- What factors contribute to your area's unemployment rate?
- Which industries have expanded?
- Which industries have contracted?
- Will the recent changes affect you?
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