Download The unemployment rate is the number of people

A Case Study
The September Unemployment Rate
Date of Announcement
October 3, 2003
Date of the next Announcement
November 7, 2003
Announcement
The unemployment rate for the month of September was 6.1 percent equal to
the 6.1 percent unemployment in August. Total employment rose by 57,000 in
September.
The rise in employment has received the most attention in the news as it is the
first in nine months. Some observers are saying that perhaps this indicates the
economy is truly recovering from the 2001 recession.
We should be cautious about placing too much emphasis on any one month’s
results. It may not represent a change in the trend of falling employment and
generally higher unemployment.
The original press release is available at:
http://www.bls.gov/news.release/empsit.nro.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.
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.
1
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.
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.
Table 1
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.
Data Trends
The trend over the 1990s, since the recession in 1990-1991, 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
2
At its low in December 2000, unemployment equaled 3.9 percent. But since
March 2001, the trend has generally been one of increasing unemployment and
decreasing employment. However, the unemployment rate in September (6.1
percent) is the same as the August. This is a decrease from the nine-year high
reached in June of 6.4 percent.
Total nonfarm payroll employment (seasonally adjusted) rose by 57,000 in
September to a little under 130 million persons employed.
Education and health services, other services, and construction employment
increased slightly.
Over the past 2 years, government employment has trended upward, but was
little changed this month. Recently, budget problems have lowered the rate of job
growth in state and local governments. However, local government employment
increased slightly during September.
The largest job decline in September in employment occurred in
manufacturing. This decline has continued for the last three years. The decline
was smaller than it has been over the last year.
The portion of unemployed who have been unemployed for more that one-half
of a year has steadily increased since the end of 2001 and now represents more
than 23 percent of the unemployed.
Figure 2
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 have been to the effects of the 2001
recession.
Throughout 2003, talk has turned to larger increases in real GDP and
productivity, accompanied by continuing falls in employment. That is, the
growth in the economy has not been fast enough to expand the number of
jobs. If productivity rises more rapidly than output, employment will fall.
This announcement may be a reversal of those recent trends.
Employment reached a peak in March 2001. We have almost lost 2.8
million jobs since then.
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
3
Table 2
individuals, with unemployment rates ranging from 5.3 for adult women to 17.5
percent for teenagers.
In Table 2, compare the unemployment rate for teenagers to the
unemployment rate for adults. Why are these rates different?
There are a number of explanations for the unemployment rate differentials
between teenagers and adults. Many jobs require a degree of education, skill,
and experience that teenagers lack. Education and experience measure the
amount of what economists call human capital. Most adults possess more human
capital than teenagers because they have attended college and professional
schools, have been trained in a particular field, and have job experience. The
degree of specialization and increased knowledge in a field, not to mention an
understanding of the demands of many workplaces, will tend to make an adult
worker more productive than a teenager. When an employer is hiring a worker,
the employer most often attempts to hire the most productive candidate, which is
often the more educated and more skilled worker. Therefore, adults are
preferentially hired over teenagers, an event that leads to adults having a lower
unemployment rate than teenagers.
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
4
the economy. Recent decreases in employment are of particular concern right
now.
The unemployment and employment even show different trends in some
cases. For example, in some months, including months this past summer, a
falling unemployment rate was accompanied by a fall in employment. How can
the number 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.
This month employment rose, while the unemployment rate remained
constant. The actual number of people unemployed also rose as more individuals
entered the labor force.
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. In fact, for some time the two sources have shown different trends.
Figure 3
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 and September in 2003. As growth
in spending has 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.
Part of the recent trend in falling employment at the same time real GDP is
rising is due to the difference between productivity changes and the rise in
spending. If productivity is rising more rapidly than spending and production in
the economy, fewer workers are needed to produce the greater output.
Employment, Wages, and Inflation
In September 2003, average hourly earnings for private sector increased 1 cent
to $15.45. Average weekly earnings decreased by one-tenth of one percent in
September to $520.67 in spite of the fact that average weekly hours remained
unchanged.
5
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.
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.
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.
Case Study Discussion Questions
1. What are the key parts of the unemployment announcement?
2. What are the relevant economic concepts?
3. What does this mean for workers?
Sample Answers to Case Study Questions
1. The unemployment rate remained unchanged at 6.1%. Employment increased for the
first time in nine months.
2. The rate of unemployment and the change in labor force.
3. Hourly earnings decreased slightly. Given that the labor force has been decreasing,
some potential workers may be more pessimistic about the possibility of finding a job.
6
The latest announcement is good news as more workers have been hired and may
create a more optimistic environment.
[Insert the following interactive exercises here]
1. How could employment and unemployment fall at the same time?
2. What happens to the unemployment rate if employment increases from 140
million persons to 145 million people and unemployment increases from 5 to 10
million?
3. What is the approximate current rate of unemployment?
2%
4%
6%
8%
10%
4. If a student with a summer job quits and returns to school, what will happen to
actual employment?
To actual unemployment?
To the unemployment rate?
Answers to interactive questions.
1. If those who are no longer employed actually are not looking for work and
therefore are not counted as unemployed.
2. It increases. From 3.6 % (5/140) to6.9 % (10/145).
3. 6 percent.
4. Employment decreases as there is one fewer persons working.
Unemployment does not change, as the student is no longer counted in the work
force or as unemployed.
The unemployment rate increases as the number of unemployed as stayed the
same and the labor force has decreased.
Classroom Discussion Activity
7
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?
3. Will the recent changes affect you?
Relevant National Economic Standards
The relevant national economic standards are numbers 18, 19, and 20.
18. A nation's overall levels of income, employment, and prices are
determined by the interaction of spending and production decisions made
by all households, firms, government agencies, and others in the economy.
Students will be able to use this knowledge to interpret media reports
about current economic conditions and explain how these conditions can
influence decisions made by consumers, producers, and government policy
makers.
19. Unemployment imposes costs on individuals and nations. Unexpected
inflation imposes costs on many people and benefits some others because
it arbitrarily redistributes purchasing power. Inflation can reduce the rate
of growth of national living standards because individuals and
organizations use resources to protect themselves against the uncertainty
of future prices. Students will be able to use this knowledge to make
informed decisions by anticipating the consequences of inflation and
unemployment.
20. Federal government budgetary policy and the Federal Reserve
System's monetary policy influence the overall levels of employment,
output, and prices. Students will be able to use this knowledge to
anticipate the impact of federal government and Federal Reserve System
macroeconomic policy decisions on themselves and others.
Sources Of Additional Activities
Advanced Placement Economics: Macroeconomics. (National Council on
Economic Education)
8
Activity 13. Types of unemployment. (Also see activities 21 and 22. Full
Employment in a Capitalist Economy.)
Advanced Placement Economics: Microeconomics (National Council on
Economic Education)
Unit Two: The Nature and Function of Markets
Economics USA: A Resource Guide for Teachers
Lesson 12: Monetary Policy: How Well Does It Work?
Lesson 13: Stabilization Policy: Are We Still in Control?
Focus on Economics: High School Economics (National Council on Economic
Education)
Lesson 2. Broad Social Goals of an Economy
Lesson 18. Economics Ups and Downs
Focus on Economics: Civics and Government (National Council on Economic
Education)
Lesson 11. What can a Government Do About Unemployment?
Handbook of Economic Lessons (California Council on Economic Education)
Lesson 5. Unemployment in the United States: How is it Measured?
High School Economics Courses: Teaching Strategies
Lesson 2: Different Means of Organizing an Economy
Lesson 15: Economic Goals
All are available in Virtual Economics, An Interactive Center for Economic Education
(National Council on Economic Education) or directly through the National Council
on Economic Education.
Authors:
Stephen Buckles
Erin Kiehna
Vanderbilt University
9