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A Case Study The December Unemployment Rate Date of Announcement January 6, 2006 Unemployment rate fell slightly to 4.9 percent. Date of the next Announcement February 3, 2006 Employment increases. An increase of 108,000 jobs. [SLOPES OF ARROWS ARE IMPORTANT – THE ALMOST FLAT, BUT DOWNWARD, SLOPE OF THE UNEMPLOYMENT RATE INDICATES LITTLE CHANGE IN THE UNEMPLOYMENT RATE. THE UPWARD SLOPING EMPLOYMENT ARROW INDICATES ARE A RISE IN EMPLOYMENT.] Announcement The unemployment rate for the month of December was 4.9 percent, a slight fall from the 5.0 percent in November. Total employment rose by 108,000 in December. 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 definitions of frictional, structural, and cyclical unemployment are introduced. 1 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 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. 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 Note to teachers. The number of individuals employed actually differs here 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. Data Trends The trend over the 1990s 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 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. The unemployment rates have since began to fall. 2 Figure 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. However, unemployment rates have been decreasing since reaching a high of 6.3 percent in June of 2003. Figure 2 [Insert the following interactive exercises here] 1. What is the approximate current rate of unemployment? 2% 3% 4% 5% 6% 2. Is this high or low relative to unemployment rates in the last few months? High About the same Low Answers to interactive questions. 1. Approximately 5 percent (actually 4.9 percent). 2. Compared to the last few months, current unemployment has remained about the same. The unemployment rate has ranged from 5.1 percent to 4.9 percent since March of 2005. 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 the next 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. 3 Announcements of increases in employment have received particular attention over the last year. Prior to the last year, the economy had not generated sufficient numbers of new jobs to provide new labor market entrants with jobs. Interactive questions. In questions 1 through 5, state what is happening to a hypothetical unemployment rate. Assume that the current employment equals 95 million. Assume that current unemployment equals 5 million. 1. What is the current unemployment rate in the economy described in the question? Less than 5 percent 5 percent More than 5 percent 2. What will happen to the unemployment rate if the population grows? Increase Decrease Not change 3. What if, over a year or two, 5 million of the currently employed lose jobs and begin looking for work? The unemployment rate would: Increase Decrease Not change 4. What if, over a year or two and the events in 3, 10 million enter the labor force and 5 million find jobs and 5 million continue to look? The unemployment rate would: Increase Decrease Not change Answers. 1. The unemployment rate is 5 percent. It is calculated by dividing the number of unemployed by the size of the labor force. 5 million / (5 million + 95 million). 2. Nothing will happen unless some of those new individuals enter the labor force. 3. Unemployment will rise. The unemployment rate will rise. The labor force will not change and the number of unemployed increases. The unemployment rate will be 10 percent. 10 million / (10 million + 90 million) = 10 percent. 4 4. Unemployment will rise. The labor force will increase and the number of unemployed increases. Because 50 percent of the new entrants are unemployed, the unemployment rate will increase. The unemployment rate will be 13.6 percent. 15 million / (15 million + 95 million) = 13.6 percent. 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 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 failures of employment to increase at the same rate as population growth ultimately means higher unemployment or individuals leaving the labor force. Employment is increasing once again and has been on an upward trend at rates that will provide sufficient jobs for new entrants since the beginning of 2004. Total nonfarm payroll employment (seasonally adjusted) rose by 108,000 in December to almost 143 million. The levels of employment have been growing at levels large enough to provide new entrants jobs for most of 2004 and 2005. The largest increases in jobs in October were in manufacturing and construction. Figure 3 Figure 3 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. (See the most recent GDP case study.) Figure 4 shows the monthly change in employment. Since the beginning of 2004, the overall growth rates have been rapid enough to provide jobs for new entrants into the labor force. Figure 4 5 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 decreased slightly to 4.9%. Employment increased once again this month by an amount large enough to continue to maintain low unemployment rates. 2. The rate of unemployment, the amount of employment, and the change in labor force. 3. Employment is rising rapidly enough to provide jobs for new workers entering the work force. Unemployment may decrease or individuals may enter the labor force if the changes indicate a trend. 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? 6 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) 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) 7 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. Author: Stephen Buckles Vanderbilt University 8