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The unemployment rate fell arrow
to 4.6%.

Employment increases. An increase ofarrow
75,000 jobs.

Announcement

The unemployment rate for the month of May was 4.6 percent. Total employment rose by 75,000 in May.

The original press release is available at: [EEL-link id='526' title='www.bls.gov/news.release/empsit.nr0.htm' ] .

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 defined as 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. 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   228,428,000   (excluding those under 16, members of the military, and persons in institutions)
- Not in Labor force  

77,437,000

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

150,991,000

  (total population minus those not in labor force)
- Employed   143,976,000   (individuals with jobs)
= Unemployed   7,015,000   (individuals without a job and actively searching)

 

Unemployment Rate = 7,015,000
143,976,000 + 7,015,000
= 4.6%

Data Trends

Unemployment rates have been steady this year. The previous three months have experienced unemployment rates of 4.7 or 4.8 percent. Those rates are below those of 2005 when the average rate was 5.0 percent and significantly below the average rate of 5.5 percent in 2004.

The trends from the beginning of the 1990s to the 2001 recession were a decrease in unemployment and an increase in employment.

Figure 1 shows the rises in unemployment associated with the recession in 1990 to 1991 and the recession of 2001 with an almost decade long fall in unemployment in between. Unemployment rates continued to increase after the 2001 recession, as the economy only slowly recovered.

Graph 1

At its low in December 2000, the unemployment rate equaled 3.9 percent. From March 2001 to the summer 2003, the trend was generally one of increasing unemployment rates and decreasing employment. Unemployment rates since reaching a high of 6.3 percent in June of 2003 slowly and relatively steadily decreased.

Graph 2

Unemployment rates over a longer period are shown in figure 3. As one can see, unemployment rates are currently quite low. They did go below 4 percent at the end of the 1990s, but we would have to back to the 1960s before we find unemployment rates as low as they currently are. Figure 3 also shows the highs reached in recessions in the 1970s and early 1980s recessions of over 8 and 10 percent.

Graph 3

Relevance of Unemployment Announcements

The 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.

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.

Announcements of increases in employment have been receiving increased attention. From the recession in 2001 through the year 2004, the economy had not generated sufficient numbers of new jobs to provide new labor market entrants with jobs.

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 4.2 for adult males to 14 percent for teenagers.

Table 2: Unemployment Statistics
by Gender, Race and Age
Adult Men 4.2%
Adult Women 4.1%
Whites 4.1%
Blacks 8.9%
Hispanics 5.0%
Teenagers 14.0%

Explanations of differences in unemployment rates among groups of individuals and parts of the country are differences in economic conditions, education levels, skills and experience, and discrimination.

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 important, perhaps even more important, indicators of progress in the economy. The failure of the economy to increase the number of jobs as rapidly as we experienced in the 1990s has been of particular interest and concern.

If employment does not increase at the same rate as population growth ultimately means the economy will experience higher unemployment or increasing numbers of individuals will leave the labor force.

Since the beginning of 2004, employment has been on an upward trend at rates that will provide sufficient jobs for new entrants and that trend has continued during April.

Total nonfarm payroll employment (seasonally adjusted) rose by 75,000 in May to a level of more than 135 million jobs. This follows a revised rate of increase of 126,000 jobs in April.

Graph 4

Figure 4 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 had continued to grow since.

Figure 5 shows the monthly change in employment. If the same percentage of adults are to have jobs, employment needs to grow by somewhere between 125,000 and 150,000 per month.

Increases in employment over the last four months, while still positive, have been getting smaller. We do need to be cautious about any one month's figures, but there were not sufficient jobs created in May to maintain jobs for all entrants.

Graph 5

In each of these instances, the challenges of interpreting changes in unemployment rates under all conditions are significant. In both cases, the unemployment rate moved in a direction that may seem to be counterintuitive. The primary lesson to take away is to be cautious with unemployment data and the interpretation of the data.

The Costs of Unemployment

There are significant personal costs to unemployment and these are the easiest to understand. Unemployed workers often do not have the income to support themselves or their families. The stress of being unemployed is reflected not only through the financial challenges of paying regular ongoing bills, but also 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 unemployment compensation provided to many unemployed workers. Because most workers pay the taxes that fund the unemployment compensation, the cost of being unemployed is spread among taxpayers, instead of having the entire burden fall on the unemployed workers alone.

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 of increases in unemployment.

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 those who are graduating and just entering the job market. Some frictional unemployment 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 (discussed below), the only unemployment that exists is due to friction in labor markets and structural changes in the economy.

Full employment

Economists define the approximate unemployment rate that is "full employment." If unemployment falls to a very low rate, there will be upward pressure on prices. If unemployment rises to a very high rate, there will downward pressure on prices or prices will remain steady. In the middle is a level, or more likely a range, where there is not pressure on wages to rise or fall. That is the full employment rate of unemployment.

Economists do not know for certain what that rate is and it does change over time. A consensus estimate is that the full employment rate of unemployment is currently between 4.5 and 5.0 percent of the labor force being unemployed.

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Case Study Discussion Questions

Complete the two interactive exercises below to complete this section.

 

  1. What are the key parts of the unemployment announcement?
  2. What should fiscal and monetary policy be?