Focus on Economic Data

INTRODUCTION

The case study summarizes the content of the February 1, 2008, U.S. Department of Labor announcement of unemployment rates and employment data for the month of January, 2008. The meaning and importance of the data are discussed. Exercises are included for reinforcing the concepts.

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.

Employment and Unemployment Data

Reported by the BLS, February 1, 2008

• The U.S. Unemployment Rate was 4.9% in January, 2008, a decrease of 0.1% from December, 2007.
• The Unemployment Level decreased by 17,000, to a total of 7.6 million unemployed.
• Non-farm payroll employment remained essentially the same at 138.1 million.
• The labor force participation rate (66.1 percent) was about the same as in December.

Note: an additional 179 million people in the U.S. were not included in the Labor Force.

Key U.S. Economic Indicators as of February 1, 2008

• Inflation - The Consumer Price Index for All Urban Consumers (CPI-U) decreased 0.1 percent in December before seasonal adjustment to a level of 210.036.

• Unemployment - The U.S. Unemployment Rate was 4.9% in January, 2008, a decrease of 0.1% from December, 2007. The Unemployment Level decreased by 17,000, to a total of 7.6 million unemployed.

• Real GDP - Real gross domestic product increased at an annual rate of 0.6 percent in the fourth quarter of 2007.

• Federal Reserve - The Federal Reserve lowered the target federal funds rate in two steps in January, 2008, by a total of 1.25% to 3.0%.

TASK

PROCESS

The case study summarizes the content of the February 1, 2008, U.S. Department of Labor announcement of unemployment rates and employment data for the month of January, 2008. The meaning and importance of the data are discussed. Exercises are included for reinforcing the concepts.

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.

Bureau of Labor Statistics Announcement, February 1, 2008

Both nonfarm payroll employment, at 138.1 million, and the unemployment rate, at 4.9 percent, were essentially unchanged in January, the Bureau of Labor Statistics of the U.S. Department of Labor reported today. The small January movement in nonfarm payroll employment (-17,000) reflected declines in construction and manufacturing and job growth in health care. Average hourly earnings rose by 4 cents, or 0.2 percent, over the month.

Unemployment (Household Survey Data)

The number of unemployed persons (7.6 million) and the unemployment rate (4.9 percent) were essentially unchanged in January. Over the month, the unemployment rates for all major worker groups--adult men (4.4 percent), adult women (4.2 percent), teenagers (18.0 percent), whites (4.4 percent), blacks (9.2 percent), and Hispanics (6.3 percent)--showed little or no change. The unemployment rate for Asians was 3.2 percent, not seasonally adjusted.

• The U.S. Unemployment Rate was 4.9% in January, 2008, a decrease of 0.1% from December, 2007.
• The Unemployment Level decreased by 17,000, to a total of 7.6 million unemployed.
• Non-farm payroll employment remained essentially the same at 138.1 million.
• The labor force participation rate (66.1 percent) was about the same as in December.

[NOTE: An additional 179 million people in the U.S. were not included in the Labor Force.]

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

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 labor force is th sum of the number of people who are unemployed and the number of people who are employed. See the current labor force 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.

Table 1: Calculation of the Unemployment Rate

Employment and Unemployment Data Trends

Unemployment rates had been somewhat steady in the last quarter of 2007, increased by 0.3% in December, but remaining essentially the same as in January. The previous three months of 2007 had experienced unemployment rates of 4.7 or 4.8 percent. The January rate was similar to the 2005 average rates of 2005, but still below the 2004 average rate of 5.5%.

The trend from the beginning of the 1990s to the 2001 recession were a decrease in unemployment 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.

At its low in December 2000, the unemployment rate equaled 3.9 percent. From March 2001 to the summer 2003, the trend was generally one of increasing unemployment rates and decreasing employment. Unemployment rates since reaching a high of 6.3 percent in June of 2003 slowly and relatively steadily decreased.

Unemployment rates over a longer period are shown in Figure 3. As you can see, unemployment rates are currently quite low. They did go below 4 percent at the end of the 1990s, but we would have to back to the 1960s before we find unemployment rates as low as they currently are. Figure 3 also shows the high levels reached in recessions in the 1970s and early 1980s recessions of over 8 and 10 percent.

Figure 4 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 5 shows the monthly change in employment. If the same percentage of adults are to be employed, jobs and employment need to grow by between 125,000 and 150,000 jobs per month.

Increases in employment over the last four months, while still positive, have been getting smaller. Be cautious about making generalizations from any one month's figures. In any case, the number of jobs must increase each month by at least the same as the increase in the adult population or the labor force.

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 than the unemployment rate. However, the employment data are equally, perhaps even more, important indicators of the direction of the U.S. economy.

Announcements of increases in employment have been receiving increased attention. From the recession in 2001 through the year 2004, the economy had not generated sufficient numbers of new jobs to provide new labor market entrants with jobs.

Distribution of Unemployment

Unemployment varies significantly among groups of individuals and parts of the country. Table two shows the December, 2007, unemployment rates for a number of groups of individuals, with unemployment rates ranging from 4.4 for adult males and adult females to 17.1 percent for teenagers.

Table 2: Unemployment Statistics by Gender, Race and Age (January, 2008)

In January, the unemployment rate rose for two groups (African Americans and teenagers), decreased for one group (adult women) and remained the same for the rest. Most major worker groups had experienced increases in their jobless rates over the year 2007.

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

Industry Payroll Employment (Establishment Survey Data)

In January, total nonfarm payroll employment was about unchanged (-17,000), after edging up in November (60,000) and December (82,000). In 2007, payroll employment increased by an average of 95,000 jobs per month. Both construction and manufacturing employment continued to decline in January, and health care employment rose.

Construction employment decreased by 27,000 in January and has fallen by 284,000 since its peak in September 2006. Over-the-month job losses occurred in residential building (-10,000) and residential specialty trade contractors (-18,000).

Manufacturing lost 28,000 jobs in January. Over the month, small declines occurred among many durable and nondurable goods industries. Manufacturing has lost 269,000 jobs over the past 12 months.

In the service-providing sector, health care employment continued to grow in January (27,000), about in line with average monthly gains over the prior 12 months. Within health care, over-the-month job gains occurred in ambulatory health care services (14,000), which includes offices of physicians, and in hospitals (10,000).

Food services employment continued to trend upward in January. From November through January, food services added an average of 16,000 jobs per month, compared with an average gain of 28,000 jobs for the 12-month period ending in October.

Employment in professional and technical services was little changed in January following a large increase (49,000) in the prior month. In 2007, job growth in this sector totaled 335,000.

In January, employment in financial activities was about unchanged as commercial banking lost 4,000 jobs, and securities, commodity contracts, and investments added 5,000 jobs. Since reaching a peak in December 2006, employment in financial activities has declined by 99,000.

In January, employment in both wholesale and retail trade was little changed. Within retail trade, employment in food and beverage stores was up by 12,000 over the month.

Manufacturing employment continued to decline in December (-31,000), with generally small but widespread losses among the component industries. Notable declines occurred in motor vehicles and parts, wood products, electrical equipment and appliances, and textile mills.

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 continued through most if 2007, but with decreases in December and January, 2008

In January, total nonfarm payroll employment was about unchanged (-17,000), after edging up in November (60,000) and December (82,000). In 2007, payroll employment increased by an average of 95,000 jobs per month.

The labor force participation rate (66.1 percent) was about the same in January as in December.

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

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 standard of living is lower as a result of an increase in unemployment. Standard of living is generally defined by per capita GDP or per capita income. If incomes or output rises faster than the population, individual workers will have more income or can purchase more goods and services, on average.

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. Lower demand for goods and services reduces the demand for workers.

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 that is "full employment". If unemployment falls to a very low rate, there will be upward pressure on prices. If unemployment rises to a very high rate, there will downward pressure on prices or prices will remain steady. In the middle is a level, or more likely a range, where there is not pressure on wages to rise or fall. That is the full employment rate of unemployment.

Economists do not agree or know for certain what that rate is and it does change over time. A consensus estimate is that the full employment rate of unemployment is currently between 4.5 and 5.0 percent of the labor force being unemployed.

Seasonal Data Adjustments

Short-run trends in labor force are influenced by seasonal and periodic fluctuations associated with recurring events such as weather, holidays, and the opening and closing of schools. Seasonal adjustment eliminates the influence of these fluctuations and makes it easier for users to observe fundamental changes in the level of the series, particularly changes associated with general economic expansions and contractions.

At the end of each calendar year, BLS updates the seasonal

adjustment factors for the labor force data derived from the Current Population Survey (CPS), or household survey. This past year, seasonally adjusted data for January 2007-November 2007 were subject to revision. The rates were unchanged in 7 of the 11 months in 2007 and changed (increased) by one-tenth of a percentage point in the months of June, July, August and October.

For a more full explanation of the seasonal adjustment process, see the BLS article at www.bls.gov/cps/cpsrs2008.pdf .

CONCLUSION

• Review with your students the following employment and unemployment data for Janaury, 2008.
• The U.S. Unemployment Rate was 4.9% in January, 2008, a decrease of 0.1% from December, 2007.
• The Unemployment Level decreased by 17,000, to a total of 7.6 million unemployed.
• Non-farm payroll employment reamined essentially the same at 138.1 million.
• The labor force participation rate (66.1 percent) was about the same as in December.

Discussion:

• What do you think this data tells us about state of the U.S. economy?

ASSESSMENT ACTIVITY

Interactive Quiz

1. What was the unemployment rate reported on February 1, 2008?

a. 4.2%

b. 4.5%

c. 4.9%

d. 5.0%

e. 5.4%

2. How did does the January, 2008, Unemployment Rate compare to the average of the rates reported in the previous six months?

a. About the same.

b. Slightly higher.

c. Slightly lower.

d. Higher than some months, lower than others.

3. When economic conditions lead people to think the economy is nearing a recession, which of these will most likely result?

a. Decreased consumer confidence will result in less spending.

b. Producers will invest more in plants and equipment.

c. Stock market prices will usually increase.

4. In Janaury, 2008December, which two of these sectors of the U.S. economy experienced job growth?

a. professional and technical services and manufacturing

b. retail trade and leisure and hospitality

c. construction and information services

d. manufacturing and retail trade

5. If unemployment increases to a high rate, what will likely

happen to average wages?

a. Increase

b. Decrease

c. No change

6. Mrs. Jones lost her job because the type of products made by her company are no longer demanded in the marketplace. Mrs. Jones experienced what type of unemployment?

a. Frictional

b. Cyclical

c. Structural

Short Answer Questions:

1. What are the key parts of the January 4, 2008, BLS unemployment announcement?

2. What sectors of the economy experienced growth in January, 2008?

3. How does the loss of one job affect other jobs?

EXTENSION 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 ). Below is an interactive notepad that students can use to attempt to answer questions using the BLS website.

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?

For further study of state and/or regional employment and unemployment data, go to the BLS reports at www.bls.gov/news.release/laus.toc.htm .

Introduction:

The focus on economic data summarizes the content of the February 1, 2008, U.S. Department of Labor announcement of unemployment rates and employment data for the month of January 2008. The meaning and importance of the data are discussed. Exercises are included for reinforcing the concepts.

The purpose of this focus on economic data 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.

Employment and Unemployment Data: Reported by the BLS, February 1, 2008

• The U.S. Unemployment Rate was 4.9% in January 2008, a decrease of 0.1% from December 2007.
• The Unemployment Level decreased by 17,000, to a total of 7.6 million unemployed.
• Non-farm payroll employment remained essentially the same at 138.1 million.
• The labor force participation rate (66.1 percent) was about the same as in December.

Note: an additional 179 million people in the U.S. were not included in the Labor Force.

Key U.S. Economic Indicators as of February 1, 2008

• Inflation: The Consumer Price Index for All Urban Consumers (CPI-U) decreased 0.1 percent in December before seasonal adjustment to a level of 210.036.
• Unemployment: The U.S. Unemployment Rate was 4.9% in January 2008, a decrease of 0.1% from December 2007. The Unemployment Level decreased by 17,000, to a total of 7.6 million unemployed.
• Real GDP: Real gross domestic product increased at an annual rate of 0.6 percent in the fourth quarter of 2007.
• Federal Reserve: The Federal Reserve lowered the target federal funds rate in two steps in January 2008, by a total of 1.25% to 3.0%.

Task:

• Review the summary of the unemployment and employment data reported by the U.S. Bureau of Labor for January 2008.
• Review the information about the determination of the current data, its relevance and other information about trends and types of unemployment.
• Determine what monetary or fiscal policy actions should be taken at this time in response to the employment report.

Process:

The focus on economic data summarizes the content of the February 1, 2008, U.S. Department of Labor announcement of unemployment rates and employment data for the month of January, 2008. The meaning and importance of the data are discussed. Exercises are included for reinforcing the concepts.

The purpose of this focus on economic data 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 lesson ends with exercises for students and activities that teachers can use in classrooms.

The lesson 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.

Bureau of Labor Statistics Announcement, February 1, 2008

Both nonfarm payroll employment, at 138.1 million, and the unemployment rate, at 4.9 percent, were essentially unchanged in January, the Bureau of Labor Statistics of the U.S. Department of Labor reported today. The small January movement in nonfarm payroll employment (-17,000) reflected declines in construction and manufacturing and job growth in health care. Average hourly earnings rose by 4 cents, or 0.2 percent, over the month.

Unemployment (Household Survey Data)

The number of unemployed persons (7.6 million) and the unemployment rate (4.9 percent) were essentially unchanged in January. Over the month, the unemployment rates for all major worker groups--adult men (4.4 percent), adult women (4.2 percent), teenagers (18.0 percent), whites (4.4 percent), blacks (9.2 percent), and Hispanics (6.3 percent), showed little or no change. The unemployment rate for Asians was 3.2 percent, not seasonally adjusted.

• The U.S. Unemployment Rate was 4.9% in January 2008, a decrease of 0.1% from December 2007.
• The Unemployment Level decreased by 17,000, to a total of 7.6 million unemployed.
• Non-farm payroll employment remained essentially the same at 138.1 million.
• The labor force participation rate (66.1 percent) was about the same as in December.

Note: an additional 179 million people in the U.S. were not included in the Labor Force.

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

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 labor force is the sum of the number of people who are unemployed and the number of people who are employed. See the current labor force 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.

Table 1: Calculation of the Unemployment Rate (Description)

Table 1: Calculation of the Unemployment Rate Description

Employment and Unemployment Data Trends

Unemployment rates had been somewhat steady in the last quarter of 2007, increased by 0.3% in December, but remaining essentially the same as in January. The previous three months of 2007 had experienced unemployment rates of 4.7 or 4.8 percent. The January rate was similar to the 2005 average rates of 2005, but still below the 2004 average rate of 5.5%.

The trend from the beginning of the 1990s to the 2001 recession were a decrease in unemployment 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.

At its low in December 2000, the unemployment rate equaled 3.9 percent. From March 2001 to the summer 2003, the trend was generally one of increasing unemployment rates and decreasing employment. Unemployment rates since reaching a high of 6.3 percent in June of 2003 slowly and relatively steadily decreased.

Unemployment rates over a longer period are shown in Figure 3. As you can see, unemployment rates are currently quite low. They did go below 4 percent at the end of the 1990s, but we would have to back to the 1960s before we find unemployment rates as low as they currently are. Figure 3 also shows the high levels reached in recessions in the 1970s and early 1980s recessions of over 8 and 10 percent.

Figure 4 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 5 shows the monthly change in employment. If the same percentage of adults are to be employed, jobs and employment need to grow by between 125,000 and 150,000 jobs per month.

Increases in employment over the last four months, while still positive, have been getting smaller. Be cautious about making generalizations from any one month's figures. In any case, the number of jobs must increase each month by at least the same as the increase in the adult population or the labor force.

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 than the unemployment rate. However, the employment data are equally, perhaps even more, important indicators of the direction of the U.S. economy.

Announcements of increases in employment have been receiving increased attention. From the recession in 2001 through the year 2004, the economy had not generated sufficient numbers of new jobs to provide new labor market entrants with jobs.

Distribution of Unemployment

Unemployment varies significantly among groups of individuals and parts of the country. Table two shows the December 2007, unemployment rates for a number of groups of individuals, with unemployment rates ranging from 4.4 for adult males and adult females to 17.1 percent for teenagers.

In January, the unemployment rate rose for two groups (African Americans and teenagers), decreased for one group (adult women) and remained the same for the rest. Most major worker groups had experienced increases in their jobless rates over the year 2007.

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

Industry Payroll Employment (Establishment Survey Data)

In January, total nonfarm payroll employment was about unchanged (-17,000), after edging up in November (60,000) and December (82,000). In 2007, payroll employment increased by an average of 95,000 jobs per month. Both construction and manufacturing employment continued to decline in January, and health care employment rose.

Construction employment decreased by 27,000 in January and has fallen by 284,000 since its peak in September 2006. Over-the-month job losses occurred in residential building (-10,000) and residential specialty trade contractors (-18,000).

Manufacturing lost 28,000 jobs in January. Over the month, small declines occurred among many durable and nondurable goods industries. Manufacturing has lost 269,000 jobs over the past 12 months.

In the service-providing sector, health care employment continued to grow in January (27,000), about in line with average monthly gains over the prior 12 months. Within health care, over-the-month job gains occurred in ambulatory health care services (14,000), which includes offices of physicians, and in hospitals (10,000).

Food services employment continued to trend upward in January. From November through January, food services added an average of 16,000 jobs per month, compared with an average gain of 28,000 jobs for the 12-month period ending in October.

Employment in professional and technical services was little changed in January following a large increase (49,000) in the prior month. In 2007, job growth in this sector totaled 335,000.

In January, employment in financial activities was about unchanged as commercial banking lost 4,000 jobs, and securities, commodity contracts, and investments added 5,000 jobs. Since reaching a peak in December 2006, employment in financial activities has declined by 99,000.

In January, employment in both wholesale and retail trade was little changed. Within retail trade, employment in food and beverage stores was up by 12,000 over the month.

Manufacturing employment continued to decline in December (-31,000), with generally small but widespread losses among the component industries. Notable declines occurred in motor vehicles and parts, wood products, electrical equipment and appliances, and textile mills.

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 continued through most if 2007, but with decreases in December and January, 2008

In January, total nonfarm payroll employment was about unchanged (-17,000), after edging up in November (60,000) and December (82,000). In 2007, payroll employment increased by an average of 95,000 jobs per month.

The labor force participation rate (66.1 percent) was about the same in January as in December.

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

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 standard of living is lower as a result of an increase in unemployment. Standard of living is generally defined by per capita GDP or per capita income. If incomes or output rises faster than the population, individual workers will have more income or can purchase more goods and services, on average.

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. Lower demand for goods and services reduces the demand for workers.

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 that is "full employment". If unemployment falls to a very low rate, there will be upward pressure on prices. If unemployment rises to a very high rate, there will downward pressure on prices or prices will remain steady. In the middle is a level, or more likely a range, where there is not pressure on wages to rise or fall. That is the full employment rate of unemployment.

Economists do not agree or know for certain what that rate is and it does change over time. A consensus estimate is that the full employment rate of unemployment is currently between 4.5 and 5.0 percent of the labor force being unemployed.

Seasonal Data Adjustments

Short-run trends in labor force are influenced by seasonal and periodic fluctuations associated with recurring events such as weather, holidays, and the opening and closing of schools. Seasonal adjustment eliminates the influence of these fluctuations and makes it easier for users to observe fundamental changes in the level of the series, particularly changes associated with general economic expansions and contractions.

At the end of each calendar year, BLS updates the seasonal adjustment factors for the labor force data derived from the Current Population Survey (CPS), or household survey. This past year, seasonally adjusted data for January 2007 to November 2007 were subject to revision. The rates were unchanged in 7 of the 11 months in 2007 and changed (increased) by one-tenth of a percentage point in the months of June, July, August and October.

For a more full explanation of the seasonal adjustment process, see the BLS article at [EEL-link id='1929' title='www.bls.gov/cps/cpsrs2008.pdf' ] .

Conclusion:

Review points for the employment and unemployment data for January 2008.

• The U.S. Unemployment Rate was 4.9% in January, 2008, a decrease of 0.1% from December 2007.
• The Unemployment Level decreased by 17,000, to a total of 7.6 million unemployed.
• Non-farm payroll employment remained essentially the same at 138.1 million.
• The labor force participation rate (66.1 percent) was about the same as in December.

Discussion:

What do you think this data tells us about state of the U.S. economy?

Assessment Activity:

Click the start button below to complete an online interactive quiz about the Unemployment Rate lesson.

Now complete the short answer questions to help further check your understanding on the Unemployment Rate lesson.

1. What are the key parts of the January 4, 2008, BLS unemployment announcement?
    
2. What sectors of the economy experienced growth in January 2008?
    
3. How does the loss of one job affect other jobs?

Extension Activity:

Go to the BLS website and check the Local Area Unemployment Statistics for your city and state (www.bls.gov/data/home.htm). Below is an interactive notepad that students can use to attempt to answer questions using the BLS website.

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?

For further study of state and/or regional employment and unemployment data, go to the BLS reports at www.bls.gov/news.release/laus.toc.htm.