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Explore the connection between the economic indicators and real-world issues. These lessons typically can be done in one class period.

KEY CONCEPTS

Deflation, Economic Growth, Economic Institutions, Inflation, Productivity, Tools of the Federal Reserve

Current Key Economic Indicators

as of May 5, 2013

Inflation

On a seasonally adjusted basis, the Consumer Price Index for All Urban Consumers decreased 0.2 percent in March after increasing 0.7 percent in February. The index for all items less food and energy rose 0.1 percent in March after rising 0.2 percent in February.

Employment and Unemployment

Total nonfarm payroll employment rose by 165,000 in April, and the unemployment rate was little changed at 7.5 percent. Employment increased in professional and business services, food services and drinking places, retail trade, and health care.

Real GDP

Real gross domestic product increased at an annual rate of 2.5 percent in the first quarter of 2013 (that is, from the fourth quarter to the first quarter), according to the "advance" estimate released by the Bureau of Economic Analysis. In the fourth quarter, real GDP increased 0.4 percent.

Federal Reserve

To support continued progress toward maximum employment and price stability, the Committee expects that a highly accommodative stance of monetary policy will remain appropriate for a considerable time after the asset purchase program ends and the economic recovery strengthens. In particular, the Committee decided to keep the target range for the federal funds rate at 0 to 1/4 percent and currently anticipates that this exceptionally low range for the federal funds rate will be appropriate at least as long as the unemployment rate remains above 6-1/2 percent...


arrowEmployment increases slowly. Plus 57,000 jobs.

arrowUnemployment rate falls very slightly to 5.9 percent.

Announcement

The unemployment rate for the month of November was 5.9 percent, a slight decrease from the 6.0 percent in October. 5 Total employment rose by 57,000 in November. The increase in employment in October was revised upward to 137,000. The relatively slow increase in employment has received the most attention in the news.

A similar press release from August 6, 2004 is available at: www.statcan.ca/Daily/English/040806/d040806a.htm .

Teachers' Notes

Material in italics in this case does not appear in the student version. Each case describes the most current data and trends and expands expectations of student understanding. In this case, the relation among employment, wages, and inflation is introduced, along with definitions of frictional, structural, and cyclical unemployment.

You may wish to use the following larger versions of the graphs and tables from this lesson for overhead projection or handouts in class:

Definition Of The Unemployment Rate

The unemployment rate is the percentage of the U.S. labor force that is unemployed. It is calculated by dividing the number of unemployed individuals by the sum of the number of people unemployed and the number of people employed. The number of people unemployed and the number of people employed is the number of individuals in the labor force. 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.

        Description
Table 1: Calculation of the Unemployment Rate
Total civilian population   222,279,000   (excluding those under 16, members of the military, and persons in institutions)
- Not in Labor force   75,002,000   (retired, students, individuals choosing not to work)
= Labor force  

147,277,000

  (total population minus those not in labor force)
- Employed   138,603,000   (individuals with jobs)
= Unemployed   8,674,000   (individuals without a job and actively searching)

 

Unemployment Rate = 8,674,000
138,603,000 + 8,674,000
= 5.9%

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, perhaps even more, important indicators of the direction of the U.S. economy.

Recent announcements have received particular attention as employment continues to fall and unemployment has increased. Discussion in the press will focus on whether the U.S. economy continues in a very slow growth pattern and whether or not something should be done by the federal government or Federal Reserve.

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.

Data Trends

The trend over the 1990s, since the recession in 1990-1991 and up to the 2001 recession, has been a decrease in unemployment and an increase in employment. In 1999 and 2000, annual growth in employment was 2.8 million people, with approximately 155,000 more people employed each month. That trend added employment of over 15 million people during the last decade.

Figure 1: The U.S. Unemployment Rate since 1990

At its low in December 2000, unemployment equaled 3.9 percent. Since March 2001 however, the trend has generally been one of increasing unemployment and decreasing employment. In 2003, from January to July, employment fell by a monthly average of 85,000 jobs. Employment however, seems to be increasing once again. This is the fourth consecutive month of employment increases, albeit rather small increases. The unemployment rate in October November (5.9 percent) decreased from the previous two month s' rate of 6 . 1 and 6.0 percent. This is a decrease from the nine-year high in June of 6.4 percent.

Total nonfarm payroll employment (seasonally adjusted) rose by 57 ,000 in November to over 130 million . The increase in employment in October was also revised upward to a 137,000 increase. The largest job decline s in November occurred in retail trade and in manufacturing . Jobs increased primarily in services and health care.

Over the past 2 years, government employment has trended upward, whil e private sector employment trended downward , with particularly large falls in manufacturing employment . Recently, budget problems have lowered the rate of job growth in state and local governments.

Figure 2:  Recent Unemployemnt Rates in the U.S.

Importance of the Changes

In newspapers and magazines and on television news, much has been written and said about economic problems in the U.S. economy and rising unemployment. The references are to the slowing growth in consumer spending, falling investment spending, and resulting cutbacks in production and employment. The increase in the unemployment rate from 3.9 percent to the current 5. 7 9 per cent, as well as the decrease in the number of people employed, are the results of those changes in spending.

Employment reached a peak in March 2001. We have lost almost 2.8 million jobs since then.

Much attention as been given to the lack of increases in employment since the end of the recession in November of 2001. Newspapers have commonly referred to the “jobless recovery” as real gross domestic product has increased due to large increases in productivity and without significant increases in employment.

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 5.1 5. 1 for adult women to 14.6 1 5.5 percent for teenagers.

Table 2: Unemployment Statistics by Gender, Race & Age

Adult Men   5.7%  
Adult Women   5.1%  

Whites   5.2%  
Blacks   10.2%  
Hispanics   7.4%  

Teenagers   15.5%  

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 the largest part, from tax revenues. Therefore, unemployment compensation spreads out the cost of being unemployed among taxpayers, instead of having the entire burden fall on the unemployed worker.

Increases in unemployment also mean that the economy is wasting an important scarce resource – labor. Real GDP is less than it otherwise could be and that additional output is lost forever. If more individuals had been employed, production of goods and services would have been higher.

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 essential indicators of progress in the economy. Decreases in employment have been of particular concern.

The unemployment and employment even show different trends in some cases. For example, in some months, a falling unemployment rate was accompanied by a fall in employment. How can the numbers of individuals employed fall and the unemployment rate fall at the same time?

This must mean that the number of individuals unemployed fell also. Most likely, what has happened is that some unemployed individuals became discouraged and are no longer looking for work. 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 also are not counted as unemployed. If both events happen, the unemployment rate can fall at the same time the number of individuals with jobs actually decreases.

In many of recent months the labor force has actually declined as some of the newly unemployed dropped out of the labor force and many who would normally enter the labor force have not.

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: Seasonally Adjusted Monthly Employemnt

Figure 3 shows that growth in employment slowed in 2000 and stopped in March of 2001. Employment actually decreased in all but one of the months of 2001, all but four in 2002, and all but January in 2003. Finally in August of this year, employment has begun to grow. As growth in spending slowed and actually decreased in the first three quarters of 2001, businesses 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.

Figure 4 shows the monthly change in employment. The last four months may well show a beginning of a trend of increasing employment.

Figure 4: Monthly Change in Unemployment

A Controversy

Much concern has been expressed with high unemployment rates and the failure of the number of employed to increase as real GDP has begun to grow after the 2001 recession. That is possible due to the relatively rapid increases in productivity that we have experienced in the last two quarters and for the entirety of 2002.

The Department of Labor does collect two different sets of employment data and the set most often used to measure employment has shown significant falls and gains only in the last four months. The other has shown growth in employment over a longer period. There is a good bit of as yet unresolved discussion of the current accuracy of the employment reports.

This is a reminder that while our data are among the most accurate in the world, the data are not perfect and we do make mistakes.

Employment, Wages And Inflation

In October November 2003 2002 , average hourly earnings for private sector increased by cents to increased by 1 cent to $ 15. 46. A verage weekly earnings increased by a larger four-tenths of one percent in November to $ 524.09 as average weekly hours increased .

To a worker, wages represent income and a quantity of goods and services that can be purchased as a result of an hour's labor. To employers, wages represent the cost of an input. An employer usually has additional costs of labor such as supplements, benefits and insurance plans. Productivity has been increasing at a relative rapid rate and that has actually lowered labor costs in most industries.

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.

Types of Unemployment

There are three types of unemployment, each of which describes the particular circumstances of the individual and their employment situation. Frictional unemployment is temporary unemployment arising from the normal job search process. Frictional unemployment helps the economy function more efficiently as it simply refers to those people who are seeking better or more convenient jobs and will always exist in any economy.

Structural unemployment is the result of changes in the economy caused by technological progress and shifts in the demand for goods and services. Structural changes eliminate some jobs in certain sectors of the economy and create new jobs in faster growing areas. Persons who are structurally unemployed do not have marketable job skills and may face prolonged periods of unemployment, as they must often be retrained or relocate in order to find employment.

Cyclical unemployment is unemployment caused by a drop in economic activity. This type of unemployment can hit many different industries and is caused by a general downturn in the business cycle.

At the NAIRU level of unemployment discussed above, the only unemployment that exists is due to friction in labor markets and structural changes in the economy.

Case Study Discussion Questions

  1. What are the key parts of the unemployment announcement?

    [The unemployment rate increased decreased to 5.9%. (However this is a very small decrease and unless it continues to steadily falls, not much importance should be attached.) Employment increased once again this month, but increased by a relatively small amount. The failure of employment to rise at a rate that will significantly lower the unemployment rate continues to be a concern. Hourly and average wages slightly increased slightly this month.]
  2. What are the relevant economic concepts?

    [The rate of unemployment, the amount of employment, and the change in labor force.]
  3. What does this mean for workers?

    [With employment rising, workers may well become more optimistic and this could mean a future increase in the size of the labor force.]