Focus on Economic Data: The Unemployment Rate - October 2001

Announcement

The unemployment rate for the month of October 2001 was 5.4 percent, up a sharp 0.5% from September. The number of individuals employed decreased by 415,000.

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 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 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 increasing concern that the U.S. economy is already in or will soon be in a recession.

Data Trends

The unemployment rate in October was up significantly from September, to the highest level since December 1996. This is the largest increase in the unemployment rate in 21 years.

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 hovered at a low of 3.9 percent, one and a half percent less than it is this October. 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 415,000 to 937,000 jobs lost. Employment was down across almost all categories, with the only major sector reporting an increase in employment being the state, local, and federal government (24,000). Job losses were most prominent in the manufacturing sector (142,000 jobs) and services (111,000).

The current report is the first to include the employment level in the United States since September 11th. (The September unemployment data were collected during the week of September 9th and counted anyone working any part of that week as employed). While the U.S. Department of Labor attributed much of the fall in employment to the effect of terrorist attacks of September 11, the Department of Labor states that the unemployment rate was increasing before the attacks and the terrorist actions only exacerbated the situation. Furthermore, they state that quantifying the full effect of the events of September 11th is impossible.

Importance of the Changes

Unemployment in the United States rose sharply in October. 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 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 decrease in the number of people employed this month are 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 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.

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.

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 1.7%, followed by Nebraska at 3.0% and South Dakota and Virginia with a rate of 3.1%. The highest levels of unemployment were experienced in Oregon (6.4%), Alaska (6.4%) and the District of Columbia (6.6%). But rates vary even more by city. Fargo, ND had the lowest unemployment rate of 1.1%, followed by Bismark, ND (1.3%), Madison, WI (1.6%), and College Station, TX, Columbia, MO, and Grand Forks, ND (1.7%). Among the highest rates in the country are Fresno, CA (9.4%), McAllen/Edinburg/Mission, TX (12.4%), and Visalia/Tulare/ Porterville, CA (12.9%). 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.

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.

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 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 five of the last seven 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. Economists have not agreed upon whether we have reached that point.

Employment, Wages and Inflation

In October 2001, average hourly earnings for private sector workers increased by 2 cents to $14.47. Over the past twelve months, average hourly earnings rose by 4.1% and average weekly earnings rose by 2.9%. 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 October 24, 2001, in preparation for the Open Market Committee meeting on November 6, 2001.

"Reports from all Federal Reserve Districts indicate weak economic activity in September and the first weeks of October. In all Districts, the tragedy of September 11 was followed by a short period of sharply reduced activity. Business activity recovered quickly from some aspects of the shock, such as reduced air cargo capacity, but longer-run effects are more difficult to assess. Retail sales, other than autos, were slightly lower than before September 11, but this weakness might have already been in train. The same is true for manufacturing. Insurance premiums have increased, and security precautions are disrupting productivity.

"The softness in consumer spending, manufacturing, and construction is affecting the labor market, where layoffs and plant closings have been reported in many industries, from financial services on the East Coast to media and advertising on the West Coast to auto parts in the central states. Manufacturers were reducing salaries in the Boston District, and wages were down in parts of the San Francisco District. Steady wages or no wage pressure are reported in the Chicago, Kansas City, New York, and Richmond regions, as well as among temporary workers in the Minneapolis region. The Atlanta, Cleveland, and Dallas Districts report that wage pressures had subsided or were subdued."

The original press release is available at:
www.federalreserve.gov/FOMC/BeigeBook/2001/20011024/default.htm

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/BoardDocs/Press/General/2001/20011002/default.htm

Case Study

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 does this mean for employers?
5. How will the Federal Reserve decision-makers likely react?

Classroom Activity

Go to the BLS website and check the Local Area Unemployment Statistics for your city and state (www.bls.gov/lau/home.htm).

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?
5. Will the recent changes affect you?

Other Questions about Unemployment