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INTRODUCTION

The focus on economic data summarizes the content of the January 4, 2008, U.S. Department of Labor announcement of unemployment rates and employment data for the month of December, 2007. The meaning and importance of the data are discussed. Exercises are included for reinforcing the concepts.

The purpose of this focus on economic data 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 lesson 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. The case ends with exercises for students and activities that teachers can use in classrooms.

Employment and Unemployment Data

Reported by the BLS, January 4, 2008

  • The U.S. Unemployment Rate was 5.0% in December, 2007, an increase of 0.3% from November, 2007.
  • The Unemployment Level increased by 474,000, to a total of 7,655,000 unemployed.
  • The Employment Level decreased by 436,000 to a total of 146.2 million people.
  • The total number of jobs in the U.S. economy increased by 18,000.

Note: an additional 179 million people in the U.S. were not included in the Labor Force.

Key U.S. Economic Indicators as of January 4, 2008

  • Inflation The CPI for all urban consumers (CPI-U) increased 0.6 percent in November to 210.177.
  • Unemployment The Unemployment Rate was 5.0% in December, 2007. A total of 7,655,000 people were unemployed.
  • Real GDP Real GDP increased at an annual rate of 4.9% in the third quarter of 2007.
  • Federal Reserve The Federal Reserve lowered the target federal funds rate by .25% to 4.25% December 11, 2007.

TASK

Review the summary of the unemployment and employment data reported by the U.S. Bureau of Labor for December, 2007.

Review the information about the determination of the current data, its relevance and other information about trends and types of unemployment.

PROCESS

U.S. Bureau of Labor Statistics Announcement, January 4, 2008

'The unemployment rate rose to 5.0 percent in December, while nonfarm payroll employment was essentially unchanged (+18,000), the Bureau of Labor Statistics of the U.S. Department of Labor reported today. Job growth in several service-providing industries, including professional and technical services, health care, and food services, was largely offset by job losses in construction and manufacturing.
Average hourly earnings rose by 7 cents, or 0.4 percent.'

Employment and Unemployment Data (reported January 4, 2008)

  • The U.S. Unemployment Rate was 5.0% in December, 2007, an increase of 0.3% from November, 2007.
  • The Unemployment Level increased by 474,000, to a total of 7,655,000 unemployed.
  • The Employment Level decreased by 436,000 to a total of 146.2 million people.
  • The total number of jobs in the U.S. economy increased by 18,000.

Note: an additional 179 million people in the U.S. were not included in the Labor Force.

The original press release is available at: 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.

Table 1: Calculation of the Unemployment Rate (Description)

Total civilian population   233,156,000   (excluding those under 16, members of the military, and persons in institutions)
- Not in Labor force  

78,718,000

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

153,866,000

  (total population minus those not in labor force)
- Employed   146,211,000   (individuals with jobs)
= Unemployed   7,655,000   (individuals without a job and actively searching)

 

Unemployment Rate = 153,866,000 + 7,655,000 = 5.0%

Employment and Unemployment Data Trends

Unemployment rates had been somewhat steady in the last quarter of 2007, but increased by 0.3% in December. The previous three months had experienced unemployment rates of 4.7 or 4.8 percent. The December rate returned to the 2005 average rates of 2005, but still below the 2004 average rate of 5.5%.

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.
figure1
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.
figure2
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.

figure3
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.
figure4
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.
figure5
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.

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.

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 December, 2007, unemployment rates for a number of groups of individuals, with unemployment rates ranging from 4.4 for adult males and adult females to 17.1 percent for teenagers.

Table 2: Unemployment Statistics
by Gender, Race and Age (December 2007)
Adult Men 4.4% + .3%
Adult Women 4.4% + .3%
Whites 4.4% + .3%
Blacks 6.3% + .6%
Hispanics 3.7% + .1%
Teenagers 17.1% + .7%

In December, unemployment rates rose for all major worker groups. Most major worker groups experienced increases in their jobless rates over the year 2007.

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

Industry Payroll Employment (Establishment Survey Data)

Total nonfarm payroll employment was essentially unchanged at 138.5 million in December.

In December, job growth continued in professional and technical services, health care, and food services.

Employment in construction and manufacturing continued to decline. The retail trade and information industries also lost jobs over the month.

Employment in professional and technical services was up by 33,000 in December and by 322,000 over the year. Within this industry grouping, employment continued to trend up in December in architectural and engineering services and in management and technical consulting services. Within administrative and support services, services to buildings and dwellings added 19,000 jobs.

In the health care industry, job growth continued in December with a gain of 28,000. The industry has added 381,000 jobs over the year. In December, job gains occurred in hospitals and ambulatory health care services.

Employment in food services continued to expand over the month with a gain of 27,000. Over the year, the food services industry has added 304,000 jobs. The gains in health care and food services combined accounted for about two-thirds of all private sector job growth in 2007.

Mining employment rose by 5,000 in December following a gain of 4,000 in November. In 2007, the industry has added 36,000 jobs.

In December, employment in construction fell by 49,000, with losses occurring throughout the industry. Since its peak in September 2006, construction employment has fallen by 236,000, with the residential components accounting for the decline.

Within financial activities, credit intermediation lost 7,000 jobs in December, bringing the total job loss since the industry’s peak in February 2007 to 79,000.

Manufacturing employment continued to decline in December (-31,000), with generally small but widespread losses among the component industries. Notable declines occurred in motor vehicles and parts, wood products, electrical equipment and appliances, and textile mills.

Factory employment has declined by 212,000 over the past year.

Retail trade employment was down by 24,000 in December following an increase in the prior month. Over the year, employment in retail trade was essentially flat.

In December, employment in the information industry fell by 13,000; losses occurred in motion picture and sound recording industries and in broadcasting, except Internet. Information employment was essentially unchanged over the year.

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 through most if 2007, but with a decrease in December.

Total nonfarm payroll employment (seasonally adjusted) decreased 38,000 in December to a level of more than 146.2 million jobs. The employment-population ratio decreased in December to 62.7%, following increases in November.

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.

A Note on the Revision of Seasonally Adjusted Household Survey Data

Short-run trends in labor force are influenced by seasonal and periodic fluctuations associated with recurring events such as weather, holidays, and the opening and closing of schools. Seasonal adjustment eliminates the influence of these fluctuations and makes it easier for users to observe fundamental changes in the level of the series, particularly changes associated with general economic expansions and contractions.

At the end of each calendar year, BLS updates the seasonal adjustment factors for the labor force data derived from the Current Population Survey (CPS), or household survey. This year, seasonally adjusted data for January 2007-November 2007 were subject to revision. The rates were unchanged in 7 of the 11 months in 2007 and changed (increased) by one-tenth of a percentage point in the months of June, July, August and October.

For a more full explanation of the seasonal adjustment process, see the BLS article at www.bls.gov/cps/cpsrs2008.pdf .

CONCLUSION

For Review:

  • The U.S. Unemployment Rate was 5.0% in December, 2007, an increase of 0.3% from November, 2007.
  • The Unemployment Level increased by 474,000, to a total of 7,655,000 unemployed.
  • The Employment Level decreased by 436,000 to a total of 146.2 million people.
  • The total US Civilian Labor Force increased by 38,000 people.

To think about:

  • What do you think this data tells us about state of the U.S. economy?

ASSESSMENT ACTIVITY

Click the start button below to complete an online interactive quiz about the Unemployment Rate lesson.

Below are a few more questions to help check your understanding on the Unemployment Rate lesson.

 

  1. What are the key parts of the January 4, 2008, BLS unemployment announcement?
     
  2. What sectors of the economy experienced growth in December 2007?
     
  3. Why does the loss of one job affect other jobs?

EXTENSION ACTIVITY

Go to the BLS website and check the Local Area Unemployment Statistics for your city and state (www.bls.gov/lau/home.htm ). Below is an interactive notepad that students can use to attempt to answer questions using the BLS website.

 

  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?
     
  3. Which industries have expanded?
     
  4. Which industries have contracted?


For further study of state and/or regional employment and unemployment data, go to the BLS reports at www.bls.gov/news.release/laus.toc.htm .