Unemployment Update – July

The unemployment rate remained at 5.0 percent in June. Approximately 7.5 million individuals were unemployed. Employment increased by 207,000 during June.

The employment and unemployment data for August will be released on August 5.

The next full-length case study will be online September 2 and will discuss the August unemployment rate and changes in employment.

 Unemployment rate decreases to 5.1 percent. Employment continues to increase but at a slower than expected pace. An increase of 78,000 jobs.

Announcement

The unemployment rate for the month of May was 5.1 percent, down from 5.2 percent in April. Total employment increased by 78,000 in May. The relatively small increase in employment has received the most attention in the news.

The original press release is available at: [EEL-link id='526' title='www.bls.gov/news.release/empsit.nr0.htm' ] .

Interactive Questions

Some months the unemployment rate falls and the number of employed falls; other months the unemployment rates rises while the number of employed rises. This month, unemployment rate fell slightly and the number of unemployed rose by less than expected and by less than the amount necessary simply to provide enough jobs over time for expansion in the working age population. See if you can explain these events.

Please do the following multiple choice activity:

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 plus the number of people employed equals 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. For example, students over 16, who choose to not work, and retirees are not in the labor force, and therefore not counted in the unemployment rate. Both are counted as part of the working age population in table 1.

Description

Table 1: Calculation of the Unemployment Rate
Total civilian population   225,669,000   (excluding those under 16, members of the military, and persons in institutions)
- Not in Labor force

76,547,000

(retired, students, individuals choosing not to work)
= Labor force

149,122,000

(total population minus those not in labor force)
- Employed   141,475,000   (individuals with jobs)
= Unemployed   7,647,000   (individuals without a job and actively searching)

 Unemployment Rate = 7,647,000 7,647,000 + 141,475,000 = 5.1%

A Caution

As discussed later in the case, the increase in the number of employed individuals has increased by a smaller than expected amount and by an amount that will not provide sufficient jobs to provide for population growth.

However this is a single month change and does not necessarily indicate a change in the trend. In the last fifteen months, employment has been growing by an average of 192,000 jobs per month. That is rapid enough to provide new entrants jobs and to bring down unemployment rates. While this month's relatively small increase is receiving attention in newspapers, it does not necessarily signal a change in the trend. We should always be cautious about a single month's change in any of the economic data we study.

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 later in this case study.

Changes in levels of employment are also included in the announcements and have increasingly received more attention. The employment data are equally, perhaps even more, important indicators of the direction of the U.S. economy.

Part of the reason for the new focus on employment has been the recent history of employment. Employment reached a peak in February 2001, just before the beginning of the most recent recession. The recovery from the recession has often been described as a jobless recovery as it has taken a relatively long time for the number of jobs to return to its previous high. We only did so in January of 2005. See figure 1.

Data Trends

The trend over the 1990s, since the recession in 1990 - 1991 and up to the 2001 recession, was a decrease in the unemployment rate and an increase in employment. Employment expanded by over 15 million jobs during that decade and unemployment fell from 7.8 percent to 3.8 percent.

Figure 2 shows the rise in unemployment associated with the two recessions in 1990/1991 and 2001 with the almost decade long fall in unemployment in between. Unemployment reached a high following each recession of 7.8 percent in 1992 and 6.3 percent in 2003.

At its low in 2000 prior to the most recent recession, unemployment equaled 3.8 percent. From March 2001 to the summer 2003, however, the trend was reversed - generally one of increasing unemployment rates and decreasing employment. Figure 3 focuses on unemployment just prior to, during, and following the most recent recession.

In the summer of 2003, unemployment rates began to fall gradually and have come down slightly more than one full percentage point. The unemployment rate in May (5.1 percent) continues a very gradual fall since the beginning of the year.

Figure 4 shows the even higher unemployment rates during the recessions in the 1970s and early 1980s, reaching a high for the last 50 years of 10.8 percent in November and December of 1982.

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 indicators of progress in the economy. The failure of the economy to produce as many jobs as we have experienced in the past has been of particular interest and concern.

The failure of employment to increase at the same rate as population growth ultimately means higher unemployment or lower labor force participation. Estimates of the number of new jobs needed each month simply to provide new entrants with jobs and not have unemployment rates increase is between 125,000 and 150,000.

In some months during and following the recession, the labor force 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.

Much of the fall in employment from 2001 to 2003 was in manufacturing. Blame in the press 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. While trade is partially responsible, larger influences were the lingering effects of the recession and continuing increases in productivity.

Figure 5 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 has grown since. (See the most recent GDP case study.)

Employment has been increasing since the summer of 2003 and for the last year has been increasing at rates fast enough to begin to lower unemployment rates and to provide new jobs for new entrants into the job market.

Total nonfarm payroll employment (seasonally adjusted) rose by 78,000 in May to more 133 million jobs. The increase in employment in the last year has averaged more than 200,000 jobs per month and that is sufficient to keep unemployment rates falling.

The largest increases in jobs in May were in services, particularly in education and health services and in retail trade. Construction employment also increased. Manufacturing jobs continued to fall.

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 4.4 for adult men to 17.9 percent for teenagers.

 Adult Men 4.4% Adult Women 4.6% Whites 4.4% Blacks 10.1% Hispanics 6.0% Teenagers 17.9%

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.

One observer has said that even though the overall unemployment rate is 5.1 percent, it is 100 percent for a person who does not have a job. The intention of the statement is to emphasize how serious unemployment can be for individuals.

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.

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. It is the type of unemployment we experienced as a result of the recession four years ago.

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?

4. What should monetary policy be, given the changes this month?

Please do the following multiple choice activity: