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The unemployment rate remained at 5.0 percent in June. Approximately 7.5 million individuals were unemployed. Employment increased by 207,000 during June.

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.


Unemployment Update – July

The unemployment rate remained at 5.0 percent in June. Approximately 7.5 million individuals were unemployed. Employment increased by 207,000 during June.

The employment and unemployment data for August will be released on August 5.

The next full-length case study will be online September 2 and will discuss the August unemployment rate and changes in employment.

Recent Unemployment Rates in the US

 

arrowUnemployment rate decreases to 5.1 percent.

arrowEmployment continues to increase but at a slower than expected pace. An increase of 78,000 jobs.

Announcement

The unemployment rate for the month of May was 5.1 percent, down from 5.2 percent in April. Total employment increased by 78,000 in May. The relatively small increase in employment has received the most attention in the news.

The original press release is available at: .

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 costs of unemployment and the definitions of frictional, structural, and cyclical unemployment are discussed.

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

Interactive Questions

Some months the unemployment rate falls and the number of employed falls; other months the unemployment rates rises while the number of employed rises. This month, unemployment rate fell slightly and the number of unemployed rose by less than expected and by less than the amount necessary simply to provide enough jobs over time for expansion in the working age population. See if you can explain these events.

Please do the following multiple choice activity:

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 plus the number of people employed equals the number of individuals in the labor force. See the current calculation in table 1.

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. For example, students over 16, who choose to not work, and retirees are not in the labor force, and therefore not counted in the unemployment rate. Both are counted as part of the working age population in table 1.

        Description

Table 1: Calculation of the Unemployment Rate
Total civilian population   225,669,000   (excluding those under 16, members of the military, and persons in institutions)
- Not in Labor force  

76,547,000

  (retired, students, individuals choosing not to work)
= Labor force  

149,122,000

  (total population minus those not in labor force)
- Employed   141,475,000   (individuals with jobs)
= Unemployed   7,647,000   (individuals without a job and actively searching)

 

Unemployment Rate = 7,647,000
7,647,000 + 141,475,000
= 5.1%

[Note to teachers: The number of individuals employed reported in this table differ from the number of employed discussed later in the case. This is because the unemployment statistics and the number of employed used to calculate the unemployment rate come from different surveys than those used to track changes in the number of employed]

A Caution

As discussed later in the case, the increase in the number of employed individuals has increased by a smaller than expected amount and by an amount that will not provide sufficient jobs to provide for population growth.

However this is a single month change and does not necessarily indicate a change in the trend. In the last fifteen months, employment has been growing by an average of 192,000 jobs per month. That is rapid enough to provide new entrants jobs and to bring down unemployment rates. While this month's relatively small increase is receiving attention in newspapers, it does not necessarily signal a change in the trend. We should always be cautious about a single month's change in any of the economic data we study.

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 later in this case study.

Changes in levels of employment are also included in the announcements and have increasingly received more attention. The employment data are equally, perhaps even more, important indicators of the direction of the U.S. economy.

Part of the reason for the new focus on employment has been the recent history of employment. Employment reached a peak in February 2001, just before the beginning of the most recent recession. The recovery from the recession has often been described as a jobless recovery as it has taken a relatively long time for the number of jobs to return to its previous high. We only did so in January of 2005. See figure 1.

Figure 1: Seasonally Adjusted Monthly 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.

Data Trends

The trend over the 1990s, since the recession in 1990 - 1991 and up to the 2001 recession, was a decrease in the unemployment rate and an increase in employment. Employment expanded by over 15 million jobs during that decade and unemployment fell from 7.8 percent to 3.8 percent.

Figure 2 shows the rise in unemployment associated with the two recessions in 1990/1991 and 2001 with the almost decade long fall in unemployment in between. Unemployment reached a high following each recession of 7.8 percent in 1992 and 6.3 percent in 2003.

Figure 2: Seasonally Adjusted Monthly Employment

At its low in 2000 prior to the most recent recession, unemployment equaled 3.8 percent. From March 2001 to the summer 2003, however, the trend was reversed - generally one of increasing unemployment rates and decreasing employment. Figure 3 focuses on unemployment just prior to, during, and following the most recent recession.

In the summer of 2003, unemployment rates began to fall gradually and have come down slightly more than one full percentage point. The unemployment rate in May (5.1 percent) continues a very gradual fall since the beginning of the year.

Figure 3: Recent Unemployment Rates in the US

Figure 4 shows the even higher unemployment rates during the recessions in the 1970s and early 1980s, reaching a high for the last 50 years of 10.8 percent in November and December of 1982.

Figure 4: Monthly Changes int Employment 1999 to 2005

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 important indicators of progress in the economy. The failure of the economy to produce as many jobs as we have experienced in the past has been of particular interest and concern.

The failure of employment to increase at the same rate as population growth ultimately means higher unemployment or lower labor force participation. Estimates of the number of new jobs needed each month simply to provide new entrants with jobs and not have unemployment rates increase is between 125,000 and 150,000.

In some months during and following the recession, the labor force 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.

Much of the fall in employment from 2001 to 2003 was in manufacturing. Blame in the press 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. While trade is partially responsible, larger influences were the lingering effects of the recession and continuing increases in productivity.

Figure 5 shows that growth in employment slowed in the last part of 2000 and stopped in March of 2001. Employment decreased in all but six of the months from the beginning of the recession in March of 2001 to September of 2003. Finally in September of 2003, employment began to grow and has grown since. (See the most recent GDP case study.)

Employment has been increasing since the summer of 2003 and for the last year has been increasing at rates fast enough to begin to lower unemployment rates and to provide new jobs for new entrants into the job market.

Total nonfarm payroll employment (seasonally adjusted) rose by 78,000 in May to more 133 million jobs. The increase in employment in the last year has averaged more than 200,000 jobs per month and that is sufficient to keep unemployment rates falling.

The largest increases in jobs in May were in services, particularly in education and health services and in retail trade. Construction employment also increased. Manufacturing jobs continued to fall.

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 4.4 for adult men to 17.9 percent for teenagers.

Table 2: Unemployment Statistics by Gender, Race & Age

Adult Men   4.4%  
Adult Women   4.6%  

Whites   4.4%  
Blacks   10.1%  
Hispanics   6.0%  

Teenagers   17.9%  

Classroom Discussion Activity

Go to the BLS website and check the Local Area Unemployment Statistics for your city and state ( ).

  1. Is unemployment in your area higher, lower, or roughly the same as the national average?
  2. What factors contribute to your area's growth or lack of growth?

    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 jobs this summer?

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.

One observer has said that even though the overall unemployment rate is 5.1 percent, it is 100 percent for a person who does not have a job. The intention of the statement is to emphasize how serious unemployment can be for individuals.

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.

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. It is the type of unemployment we experienced as a result of the recession four years ago.

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 fell slightly.

    Employment increased once again this month, but less than the amount necessary to maintain low unemployment rates over time.]

  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 rising but did not rise rapidly enough to provide jobs for new workers entering the work force. If this rate of growth in employment would continue, unemployment rates are likely to rise.]

  4. What should monetary policy be, given the changes this month?

    [(See the most recent Federal Reserve case study.) A one month's change in employment growth should not change monetary policy. Monetary policy has been one of raising target interest rates and slowing the growth of the money supply in order to reduce the amount of economic stimulus of recent policy.

    If the change in the growth of the number of employed this month would continue for several months it would indicate that monetary policy should change to one that is more stimulative.]

Please do the following multiple choice activity: