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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 November 10, 2014

Inflation

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.

Employment and Unemployment

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.

Real GDP

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.

Federal Reserve

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.



arrowUnemployment Rate falls to 5.6 percent.

arrowEmployment increases at a slightly faster pace. An increase of 112,000 jobs.

Announcement

The unemployment rate for the month of January was 5.6 percent, a small decrease from the 5.7 percent in December. Total employment rose by 112,000 in January. The relatively slow increase in employment has received the most attention in the news, even though it was more rapid than the 16,000 (revised) increase in December.

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 not in the labor force, and therefore not counted in the unemployment rate.

        Description
Table 1: Calculation of the Unemployment Rate
Total civilian population   222,161,000   (excluding those under 16, members of the military, and persons in institutions)
- Not in Labor force   75,298,000   (retired, students, individuals choosing not to work)
= Labor force  

146,863,000

  (total population minus those not in labor force)
- Employed   138,566,000   (individuals with jobs)
= Unemployed   8,297,000   (individuals without a job and actively searching)

 

Unemployment Rate = 8,297,000
138,566,000 + 8,297,000
= 5.6%

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 remain at significantly lower levels when compared to the levels at the beginning of the 2001 recession. In addition, employment levels may well become an important issue in the 2004 presidential campaigns.

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, was 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. Over 15 million people were added to the jobs over the decade.

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

At its low in December 2000, unemployment equaled 3.9 percent. From March 2001 to June 2003, 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 fifth consecutive month of employment increases, albeit rather small increases. The unemployment rate in January (5.6 percent) decreased from the previous three months’ rate of 6.0, 5.9, and 5.7 percent. This is a decrease from the nine-year high in June of 6.4 percent.

Total nonfarm payroll employment (seasonally adjusted) rose by 112,000 in January to over 130 million. The increase in employment in December was revised to a 16,000 increase. The largest increases in jobs in January were in services, in particular, in retail trade.ments and recently the number of public jobs has remained relatively constant.

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 the failure of employment to rise to pre-recession levels. 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.

While unemployment rates are lower than the peak, some individuals have given up looking for work and thus are not counted as unemployed.

Much of the fall in employment since March of 2001 has been in manufacturing. Blame is often placed on competition from firms abroad and due to U.S. firms locating new and existing plants abroad. Such conditions often lead to controversies about the effectiveness of international trade and result in increased pressures to establish barriers to trade.

  1. Does the unemployment rate do a good job of representing conditions in the labor market in this case?

    [If individuals, who cannot find jobs, either do not enter or drop out of the labor force, the unemployment rate understates the seriousness of unemployment.]

  2. What is the approximate current rate of unemployment?

    4% | 6% | 8% | 10%

    [Approximately 6 percent. (Actually 5.6 percent.)]

  3. Is this high or low relative to recent unemployment rates?

    High | About the same | Low

    [Low. The unemployment rate has been falling since June. (However, compared to the late 1990s, it is a relatively high rate.)]

  4. If a student begins to look for a summer job now and cannot find one, what will happen to the unemployment rate?

    [The student while in school is not counted as employed or unemployed. (However, if a student is looking for a job and is willing to take a job now, the student is counted as in the labor force and among the unemployed.]

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 5.0 for adult women to 16.7 percent for teenagers.

Table 2: Unemployment Statistics by Gender, Race & Age

Adult Men   5.1%  
Adult Women   5.0%  

Whites   4.9%  
Blacks   10.5%  
Hispanics   7.3%  

Teenagers   16.7%  

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. Average standards of living are lower as a result.

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. The lack of significant increases in employment has been of particular concern most recently.

The failures of employment to increase at the same rate as population growth ultimately means higher unemployment or lower labor force participation.

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. See “A controversy” below.

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 moths of 2001, all but four in 2002, and from February through August in 2003. Finally in September of 2003, employment began to grow. (See the most recent GDP case study.)

Figure 4 shows the monthly change in employment. The last five months likely show a beginning of a trend of increasing employment, albeit a very slow rate of increase and far from reaching the pre-recession peak in employment.

Figure 4: Monthly Change in Unemployment

A Controversy

Much concern has been expressed with the failure of the number of employed to increase as real GDP began to grow after the 2001 recession. That is possibly due to the relatively rapid increases in productivity that we have experienced in the last two quarters and for the entirety of 2002. However, there is another explanation.

The Department of Labor collects 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.

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 levels of unemployment that economists consider to be the lowest possible sustainable levels, 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 decreased to 5.6%. Employment increased once again this month, but increased by a small amount. The failure of employment to rise at a rate that will significantly lower the unemployment rate continues to be a concern.]

  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?

    [Employment is not rising rapidly enough to provide jobs for new workers entering the work force. Apparently some potential workers are giving up on finding jobs and either not entering or dropping out of the labor force.]

Classroom Discussion 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 ).

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?
Which industries have expanded?
Which industries have contracted?

A good idea is to ask students to talk to your local or state employment office and report on local and state trends. The local or state employment office should be about to explain why your local statistics differ from the national data.

3. Will the recent changes affect students hunting for part-time jobs?