arrowUnemployment Rate falls to 5.6 percent.

arrowEmployment increases at a slightly faster pace. An increase of 112,000 jobs.

Announcement

The unemployment rate for the month of January was 5.6 percent, a small decrease from the 5.7 percent in December. Total employment rose by 112,000 in January. The relatively slow increase in employment has received the most attention in the news, even though it was more rapid than the 16,000 (revised) increase in December.

A similar press release from August 6, 2004 is available at: [EEL-link id='1426' title='http://community.elearners.com/forums/thread/5696.aspx' ]

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

        Description
Table 1: Calculation of the Unemployment Rate
Total civilian population   222,161,000   (excluding those under 16, members of the military, and persons in institutions)
- Not in Labor force   75,298,000   (retired, students, individuals choosing not to work)
= Labor force  

146,863,000

  (total population minus those not in labor force)
- Employed   138,566,000   (individuals with jobs)
= Unemployed   8,297,000   (individuals without a job and actively searching)

 

Unemployment Rate = 8,297,000
138,566,000 + 8,297,000
= 5.6%

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 remain at significantly lower levels when compared to the levels at the beginning of the 2001 recession. In addition, employment levels may well become an important issue in the 2004 presidential campaigns.

Data Trends

The trend over the 1990s, since the recession in 1990-1991 and up to the 2001 recession, was 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. Over 15 million people were added to the jobs over the decade.

Figure 1: The U.S. Unemployment Rate since 1990

At its low in December 2000, unemployment equaled 3.9 percent. From March 2001 to June 2003, however, the trend has generally been one of increasing unemployment and decreasing employment. In 2003, from January to July, employment fell by a monthly average of 85,000 jobs. Employment however, seems to be increasing once again. This is the fifth consecutive month of employment increases, albeit rather small increases. The unemployment rate in January (5.6 percent) decreased from the previous three months’ rate of 6.0, 5.9, and 5.7 percent. This is a decrease from the nine-year high in June of 6.4 percent.

Total nonfarm payroll employment (seasonally adjusted) rose by 112,000 in January to over 130 million. The increase in employment in December was revised to a 16,000 increase. The largest increases in jobs in January were in services, in particular, in retail trade.ments and recently the number of public jobs has remained relatively constant.

Figure 2:  Recent Unemployemnt Rates in the U.S.

Importance of the Changes

In newspapers and magazines and on television news, much has been written and said about economic problems in the U.S. economy and the failure of employment to rise to pre-recession levels. Newspapers have commonly referred to the “jobless recovery” as real gross domestic product has increased due to large increases in productivity and without significant increases in employment.

While unemployment rates are lower than the peak, some individuals have given up looking for work and thus are not counted as unemployed.

Much of the fall in employment since March of 2001 has been in manufacturing. Blame is often placed on competition from firms abroad and due to U.S. firms locating new and existing plants abroad. Such conditions often lead to controversies about the effectiveness of international trade and result in increased pressures to establish barriers to trade.

  1. Does the unemployment rate do a good job of representing conditions in the labor market in this case?
  2. What is the approximate current rate of unemployment?

    4% | 6% | 8% | 10%

  3. Is this high or low relative to recent unemployment rates?

    High | About the same | Low

  4. If a student begins to look for a summer job now and cannot find one, what will happen to the unemployment rate?

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 5.0 for adult women to 16.7 percent for teenagers.

Table 2: Unemployment Statistics by Gender, Race & Age

Adult Men   5.1%  
Adult Women   5.0%  

Whites   4.9%  
Blacks   10.5%  
Hispanics   7.3%  

Teenagers   16.7%  

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. Average standards of living are lower as a result.

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 lack of significant increases in employment has been of particular concern most recently.

The failures of employment to increase at the same rate as population growth ultimately means higher unemployment or lower labor force participation.

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. See “A controversy” below.

Figure 3: Seasonally Adjusted Monthly Employemnt

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 moths of 2001, all but four in 2002, and from February through August in 2003. Finally in September of 2003, employment began to grow. (See the most recent GDP case study.)

Figure 4 shows the monthly change in employment. The last five months likely show a beginning of a trend of increasing employment, albeit a very slow rate of increase and far from reaching the pre-recession peak in employment.

Figure 4: Monthly Change in Unemployment

A Controversy

Much concern has been expressed with the failure of the number of employed to increase as real GDP began to grow after the 2001 recession. That is possibly due to the relatively rapid increases in productivity that we have experienced in the last two quarters and for the entirety of 2002. However, there is another explanation.

The Department of Labor collects two different sets of employment data and the set most often used to measure employment has shown significant falls and gains only in the last four months. The other has shown growth in employment over a longer period. There is a good bit of as yet unresolved discussion of the current accuracy of the employment reports.

This is a reminder that while our data are among the most accurate in the world, the data are not perfect and we do make mistakes.

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 levels of unemployment that economists consider to be the lowest possible sustainable levels, the only unemployment that exists is due to friction in labor markets and structural changes in the economy.

Case Study Discussion Questions

  1. What are the key parts of the unemployment announcement?
  2. What are the relevant economic concepts?
  3. What does this mean for workers?