The unemployment rate for the month of November 2001 was 5.7 percent, up a sharp 0.4% from September. The number of individuals employed decreased by 331,000.
Current Key Economic Indicatorsas of November 30, -0001
The unemployment rate for the month of November 2001 was 5.7 percent, up a sharp 0.4% from September. The number of individuals employed decreased by 331,000.
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 communities in which they live. 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.
This particular announcement will receive additional attention as it is a large increase in unemployment, combined with the recent announcement and new stories about the current recession.
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 discussion of the definitions 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 one of the more important challenges economic policymakers face.
You may wish to use the following larger versions of the graphs and tables from this lesson for overhead projection or handouts in class:
The unemployment rate in November continued to rise to reach its highest level since August 1995. In November, employment decreased for the fifth time in seven months.
In each of the years 1999 and 2000, employment grew by 2.8 million persons, as approximately 155,000 more people were 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 that added employment of over 15 million more people during the last decade. In March of 2000, employment reached a peak and has fallen in all but two months since.
Since the last recession in 1990-1991, unemployment had been in a steady decline. A year ago, unemployment hovered at a low of 3.9 percent, Almost two percent less than this November. In April 2001, the unemployment rate began to increase and 522,000 jobs were lost between April and September. In October 2001, the number of jobs decreased by another 468,000 to 937,000 jobs lost. In November that number jumped another 331,000. Employment was down across almost all categories, with the most notable exception being the health services industry, which grew by a robust 32,000 jobs in November. Job losses were most prominent in the manufacturing sector (163,000 jobs), services (70,000), and transportation (54,000).
Importance of the Changes
Unemployment in the United States again rose sharply in November. In newspapers and magazines and on television news, much has been written and said about the U.S. recession that began in March of 2001. The references are to the slowing growth in consumer spending, falling investment spending, and resulting cutbacks in production and employment. The rapid increase in the unemployment rate from 4.9 to 5.4 percent during October and the further increase in November, as well as the decrease in the number of people employed this month is one result of those changes 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 November 2001, and the increase in the number of jobs began to slow early in the period, falling since March of 2001.
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 450 basis points (4.5%) from January 2001 to November 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.
134,084,000 + 8,160,000
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 4.1 to 31.2 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 September 2001, North Dakota had the lowest unemployment rate of 2.0%, followed by Nebraska and Delaware at 3.0%. The highest levels of unemployment were experienced in Washington (6.6%), Oregon (6.5%), Nevada (6.3%) and the District of Columbia (6.3%). But rates vary even more by city. Fargo, ND had the lowest unemployment rate of 1.1%, followed by Bismark, ND (1.2%), College Station, TX, Grand Forks, ND (1.5%) and Columbia, MO (1.6%). Among the highest rates in the country are McAllen/Edinburg/Mission, TX (10.8%), Fresno, CA (11.5%), and Visalia/Tulare/ Porterville, CA (13.9%). 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 5.5 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 rising unemployment rate combined with a significant fall in employment.
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 six of the last eight months in 2001. As growth in spending has slowed and became negative in the third quarter, businesses have reduced their labor forces. (See the most recent GDP case study.) A sustained fall in employment is one of the measures economists use when determining the existence of a recession. The current recession has been defined as starting in March and that is when employment reached its most recent high point.
Employment, Wages and Inflation
In November 2001, average hourly earnings for private sector workers increased by 5 cents to $14.52. Over the past twelve months, average hourly earnings rose by 3.9% and average weekly earnings rose by 3.3%. The weekly earnings rose by less than the hourly earnings, 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 November 28, 2001, in preparation for the Open Market Committee meeting on December 11, 2001.
"Reports from the Federal Reserve districts indicate that economic activity generally remained soft in October and the first half of November, with evidence of additional slowing in most regions outweighing signs of recovery in a few districts. Manufacturing activity weakened further, with declines in production, new orders and employment widely reported. Consumer spending was mixed--aggressive financing incentives drove automobile and light truck sales to exceptional levels, but tourism remained weak and non-auto sales were spotty, with stronger sales growth in some areas offset by weaker sales elsewhere. Prices were generally stable, although lower prices were in evidence for automobiles, gasoline, and computers. In contrast, prices for insurance and health care rose sharply.
"Labor markets continued to ease in most districts. Extremely weak labor market conditions were reported by a major employment agency in the New York district. Employment in New York City was reported to have fallen by more than 70,000 in October. Boston reported widespread weakness in the temporary employment industry; industry revenues were 30 to 40 percent lower than a year ago. Cleveland and Richmond also reported weak or slowing demand for temporary workers. In Cleveland, some industries were trimming employment as a result of the after effects of September's terrorist attacks while layoffs continued in Minneapolis and Dallas.
"In Boston, temporary employment agencies reported that clients were increasingly seeking reductions in billing rates for temporary workers, but profit margins were being maintained and wages were holding steady. Wages were slightly lower at small firms and generally flat at larger firms in the New York district. In Cleveland wage pressures eased, reportedly because workers were more uncertain about job security.
The original press release is available at:
Between January and November 2001, the Federal Reserve's Open Market Committee decided to lower the target federal funds rate 10 times, for a total decrease of 4.5% in the target federal funds rate. The discount rate was also lowered each time. Below is an excerpt from their November 6, 2001 meeting press release.
"Heightened uncertainty and concerns about a deterioration in business conditions both here and abroad are damping economic activity. For the foreseeable future, then, 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."
"Although the necessary reallocation of resources to enhance security may restrain advances in productivity for a time, the long-term prospects for productivity growth and the economy remain favorable and should become evident once the unusual forces restraining demand abate."
The original press release is available at:
What are the key parts of the unemployment announcement?
[The unemployment rate increased in November to 5.7%. This is the second consecutive large increase. The growth in the number of jobs had been slowing late last year and into the early part of 2001 and reached a peak in March of 2001. The number of jobs decreased again this month, for the fifth time in the last seven 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 has been slowing and fell in the third quarter of the year. 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 investment and consumption spending and eventually 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?
Other Questions about Unemployment
[The unemployment rate rose to its highest level in almost five years. The demographics of the unemployment rate reveal that ranges by educational attainment, from a low of 2.7 for college graduates to a high of 7.7 for workers who have not completed high school. (See the original Department of Labor announcement tables - www.bls.gov/news.release/empsit.nr0.htm.) The unemployment rate is lower for whites than minority groups and lower for people over the age of 25 than it is for teenagers (table 2).]
[The mean duration of unemployment is 13 weeks. The median duration is 7.4 weeks. A sizable number of unemployed workers who are unemployed for over 15 weeks account for this difference between the mean and the median. (Teachers should note that this is an opportune time to discuss the significance of using the mean and median as measures of an average.) Forty-one percent of September's unemployed individuals were unemployed for five weeks or less; 33 percent were unemployed for 5 to 14 weeks; and 26 percent were unemployed for 15 weeks or more. Eleven percent (included in the last group) were even unemployed for more than half of a year.]
[Thirty-eight percent of the unemployed workers were permanently laid off; 17 percent were temporally laid off. (Both of those percentages have been increasing.) Twenty-seven percent were coming back into the labor force after a period of not looking for jobs and not having a job. Individuals leaving jobs accounted for 11 percent of the unemployed and six percent were new entrants. These latter numbers have been declining over the last several months.]