The unemployment rate for the month of April was 6.0 percent, an increase of .3 percent from February. The number of individuals employed increased by 58,000 this month.
Current Key Economic Indicatorsas of November 10, 2014
The Consumer Price Index for All Urban Consumers increased 0.1 percent in October on a seasonally adjusted basis. The core inflation rate increased the same amount. For the previous 12 months, the index increased 1.7%, the same rate as reported in the September report.
According to the October report of the Bureau of Labor Statistics, the unemployment rate fell from 5.9% to 5.8%, and the number of individuals unemployed also decreased. Total nonfarm employment rose by 214,000 in October. Employment gains were concentrated in retail trade, food services and health care.
The advance estimate for real GDP growth in the third quarter of 2014 was 3.5%, a decrease from the revised second quarter growth of 4.6%. Inventory investment reduced third quarter growth, while it added to second quarter growth. In addition, consumer spending increased at a lower rate in the third quarter, compared to the second. Finally, business investment increased in the third quarter, but at a lower rate than in the second quarter.
The FOMC believes that the labor market has shown considerable improvement and the risks of inflation rising above its 2% target are low. Therefore, the Federal Reserve announced plans to end its purchase of financial assets. In addition, the federal funds rate will remain at its current low level. However, the FOMC has signaled its willingness to increase the federal funds rate if inflation shows signs of rising above the 2% target.
The unemployment rate for the month of April was 6.0 percent, an increase of .3 percent from March. The number of individuals employed increased by 58,000 this month.
The original press release is available at: www.bls.gov/news.release/empsit.toc.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 often receive less attention. However, the employment data are equally important indicators of the direction of the U.S. economy.
This particular announcement will receive attention as it reports a rather large increase in unemployment combined with an increase in employment, following decreases in employment each month since last July. The good news is, of course, the increase in employment.
Goals of the Unemployment Case Study
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 study includes additional data on the distribution of unemployment, definitions of unemployment 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 the causes and consequences of 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 April rose to 6.0 percent, the highest since August of 1994. The unemployment rate had been in the range of 5.6 percent, plus or minus .2 percent, since October 2001, following a steady rise beginning in early 2001. Employment increased for the first time since last July. (Initial announcements in each of the last two months reported increases before being significantly revised downward to actual decreases.) The trend of declining employment began in March of 2001 - the beginning of the current recession.
Since the previous recession in 1990-1991, unemployment had been in a steady decline and employment had increased. In 1999 and 2000, annual growth in employment was 2.8 million people, with approximately 155,000 more people employed each month. The trend added employment of over 15 million people during the last decade.
A little more than a year ago, unemployment hovered at a low of 3.9 percent, more than two percent less than the current peak. The number of unemployed individuals has increased by 3.1 million people since that time.
In April 2001, the unemployment rate began to increase rapidly. Despite increases in employment over the past two months, employment has fallen by almost 1.5 million people since last April. In April, continued declines in employment (-91,000) were experienced by the manufacturing and construction sectors, however these were offset by substantial employment increases in services (134,000) this month.
Importance of the Changes
In newspapers and magazines and on television news, much has been written and said about the slowing growth in the U.S. economy and most recently the impending recovery. 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 3.9 to the current 6.0 over the past year, as well as the decrease in the number of people employed are the results 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 December 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 475 basis points (4.75%) from January 2001 to December 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.
133,976,000 + 8,594,000
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 5 to 36 percent.
Unemployment rates for states and cities are released with a greater lag than the national data. In March 2002, North Dakota (3.1%), South Dakota (3.2%), and Iowa (3.4%) had the lowest unemployment rates. The highest levels of unemployment were experienced in the District of Columbia, Mississippi, and North Carolina (6.6%), Washington (6.8%), and Oregon (7.9%).
Rates vary even more by city. College Station, TX (1.5%) and Columbia, MO (2.0%) had the lowest unemployment rates. Among the highest rates in the country are Visalia/Tulare/ Porterville, CA (17.8%) and Merced, CA (18.2%). Of the largest U.S. cities, Miami had the highest unemployment at 7.5% and Hartford, CT, Boston, MA, Minneapolis MN, Columbus, OH, and Atlanta, GA all had rates of 4.1 to 4.5 percent.
Of the nine geographical areas of the country identified by the Department of Labor, the New England area including Connecticut, Maine, Massachusetts, New Hampshire, Rhode Island, and Vermont had the lowest unemployment rate at 4.1 percent and the Pacific region including Washington, Oregon, California, Alaska and Hawaii had the highest with 6.5 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 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.
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 an essential indicator of progress in the economy.
The unemployment and employment even show different trends in some cases. For example, in January 2002, a falling unemployment rate was accompanied by a significant fall in employment. How can the number of individuals employed fall and the unemployment rate fall at the same time? The data show that while the number of individuals who were unemployed fell during January, a significant number of people left the labor force. That is they are no longer looking for jobs. Many of those individuals may have simply given up on finding a job in the near future. If people lose their jobs and leave the labor force in sufficient numbers, they are not counted as unemployed. It is possible that some of those looking for jobs also give up. If both events happen, the unemployment rate can fall at the same time the number of individuals with jobs actually decreases.
This month the unemployment increased even as employment rose. The implication is that the labor force increased more rapidly than employment. These are, however, only a single month's data and any one-month change should not be considered to be a change in the trend. (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.)
Figure 3 shows that growth in employment started to slow in the middle of 2000. Employment actually decreased in two months in 2000 and in most of the months since March of 2001. As growth in spending has slowed and actually decreased in the third quarter of 2001, 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 and indeed reached a peak just before the beginning of the current recession.
Employment, Wages and Inflation
In April 2002, average hourly earnings for private sector increased by 2 cents to $14.69. Average weekly earnings fell .2% to $500.93. During the last twelve months, average hourly earnings rose by 3.4% and average weekly earnings rose by 3.1%. 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 be 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.
- What are the key parts of the unemployment announcement?
[The unemployment rate increased in April to 6.0%. Employment increased this month. Hourly wages increased slightly, but weekly earnings fell. Although most industries showed increases in employment there was continuing falling employment in the manufacturing and transportation sectors.]
- 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 increased slightly. Unemployment is still low compared to the early 1990s, but it is has increased significantly over the last year and a half.]
What does this mean for employers?
[The rate of growth in real GDP was negative in the third quarter of 2001, only slightly positive in the fourth quarter, and increased significantly in the first quarter of 2002. Employment increased this month, but is down.]
- How will the Federal Reserve decision-makers likely react?
(See the most recent FOMC case study.)
[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.
During 2001, the Federal Reserve has been concerned with the small increases in spending, the potential of decreases in spending, and the resulting increases in unemployment. That concern was the basis for the decreases in interest rates announced between January and December 2001. At both the January and March meetings, the FOMC decided to leave the target federal funds rate unchanged as it believes that it has likely provided sufficient stimulus for the economy to begin to growth once again.]
- 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 overall unemployment rate provides only an average rate. There are significant differences in unemployment rates among different groups. For example, the demographics of the unemployment rate reveal that ranges by educational attainment, from a low of 3.0 for college graduates to a high of 9.0 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 16.6 weeks. The median duration is 8.9 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.) Thirty-three percent of April's unemployed individuals were unemployed for five weeks or less; 33 percent were unemployed for 5 to 14 weeks; and 34 percent were unemployed for 15 weeks or more. Eighteen percent (included in the last group) were even unemployed for more than half of a year.]
[Forty percent of the unemployed workers were permanently laid off; 13 percent were temporally laid off. Twenty-nine 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 12 percent of the unemployed and six percent were new entrants. The number of individuals leaving jobs has increased, however we do see a moderate increase in the number of new entrants to the labor force.]