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Employment Situation ( Measures Labor Market Conditions & State of Economy) Web address: http://stats.bls.gov/news.release/empsit.toc.htm Payroll numbers revised back 2 months and benchmarked each June. Rare benchmark changes to unemployment rate but is revised. The 2 reports are rich in detail about job market and household earnings to forecast future economic activity. jobs => income => consumption (70% of GDP) => economic growth Sometimes reports are in conflict as they probe the labor market from different perspectives but in the long run the 2 numbers move in tandem. Household Survey: unemployment rate – percentage of civilian labor force that is unemployed. Lagging indicator because it responds slowly to changes in the economy. Joblessness can continue to rise 2 years after recession ends. Typically firms are slow to hire & slow to fire. A rise in the unemployment rate is a leading economic indicator of a downturn of economic activity. Layoffs now occur months before onset of recession. 60,000 homes surveyed by phone and mail (includes farm, non-farm, self-employed, domestic help) Survey is done in the week containing the 12th day of the month Determines civilian labor force (economic pool of labor) Unemployed include those who are actively seeking work, not discouraged workers. Caveat: the integrity or accuracy of the data is in question. Change in household employment is a crucial number to determine economic turning points because it includes the self-employed and the people they hire. The labor force increases by 150,000 each month due to population growth. So the economy needs to grow annually between 3-4% to create sufficient jobs to keep the unemployment rate constant. Establishment Survey: (a.k.a payroll survey) – net number of new jobs gained or lost. Most important number released. Net out change in government jobs to determine conditions in private business sector. Manufacturing hours of work > 41.5 implies economy growing. Less than 41 implies economy is struggling. Overtime hours are an excellent indicator of future employment and GDP trends. Overtime < 4 hours => layoffs. Overtime > 4.5 => new hiring. Duration of unemployment is a good barometer of economic activity. If average length of time is greater than 19 weeks indicates a weak economy. Labor underutilization includes discouraged workers (U-5) and workers who would like full-time work but have accepted part-time work (U-6). Diffusion Indexes measure the percent of industries that have increased their payrolls. Useful to assess business confidence and future employment trends. Index < 50 indicates most firms cut employees. Establishment survey is a better employment measure than household survey 400,000 business and government agencies surveyed by mail and telephone. Same mid-month schedule as household survey. 60-70% of responses make it in time for release. Large revisions due to small firms responding late with replies. This forms the basis for subsequent revisions in each of the next 2 months. But small firms are usually the first to hire and fire workers. Excludes farm workers, the self employed, and domestic help. Makes no distinction between full and part-time work. (if a worker recently gets 2 part time jobs, HH survey counts it as 1 new employed person, the establishment survey counts it as 2 new jobs) ------------------------------------------------------------------------------------------------------------------------------------------------------------------ Market Analysis: Bonds: If jobs and Y > YPot => DY/Y => DP/P => DBonds => iBonds Stocks: If jobs and Y < YPot => DY/Y => profits => PStocks Dollar: jobs => DY/Y => iBonds => dollar Recession Total Nonfarm Employment (Thousands, SA) 140000 Positive First Derivative Upward sloping +DE/DT 139000 Employment 140000 Negative First Derivative Downward sloping -DE/DT 139000 138000 138000 137000 Positive Second Derivative Increasing at an increasing rate 136000 135000 137000 Negative Second Derivative Increasing at a decreasing rate 134000 136000 135000 Negative Second Derivative Decreasing at an increasing rate 133000 132000 134000 Positive Second Derivative Decreasing at a decreasing rate 133000 132000 131000 131000 130000 130000 Inflexion Point Inflexion Point 129000 129000 04 05 06 07 08 09 10 11 12 US Payroll Employment Rate of Change Monthly Changes SA Thousands 600 A Positive 2nd derivative is a necessary but not sufficient condition for a self-sustaining recovery A positive 1st derivative is a sufficient condition for a self-sustaining recovery 600 500 500 400 400 300 200 300 200 100 100 0 -100 04 0 05 06 07 08 09 10 11 12 -100 -200 -200 -300 -300 -400 -400 -500 -600 -500 -600 -700 -800 -900 Recession Payroll 7-Month Centered Moving Average -700 -800 -900 Unemployment Rate 18 18 17 16 (Percent) 15 17 Unemployed Involuntarily working part-time Marginally attached (want jobs but haven’t searched in a month) 16 15 14 14 13 13 12 12 11 11 10 10 9 9 8 8 7 7 6 6 5 5 4 3 2 1 Recession Unemployment 4 Underemployment (U-6) Full Employment (NAIRU) 2 0 3 1 0 80 81 82 83 84 85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 Source: Department of Labor. 23 (Millions) U.S. Employment and Labor Force Household Survey 160 160 155 155 150 150 145 145 140 140 135 135 130 130 01 02 Source: Department of Labor. 03 04 05 06 Recession 07 08 09 Labor Force 10 11 12 13 Employment Okun’s Law Qtrly D U.R. 0.23 Negative correlation between DY/Y and D unemployment rate D U.R. = a + b [DY/Y] Last 60 years relationship D U.R. = 0.23 – 0.07 [DY/Y] Slope = - 0.07 / 1 0.09 3.3 in U.R. associated with DY/Y = 0 Qtrly DY/Y Slope = - 0.04 / 1 2.3 Estimated regression equation Last 13 years D U.R. = 0.09 – 0.04 [DY/Y] -a / b = -0.23 / -0.07 = 3.3 Growth associated with stable unemployment Unstable Relationship (D coefficients) due to: 1. Slower labor force growth 2. Jobless expansions 3. Slower to fire, slower to hire 4. manufacturing, service sectors 5. 1984 to present, the “Great Moderation” Chapter 8: Unemployment and Inflation Unemployment: A problem of matching workers to jobs The level and dynamics of unemployment is related to the rate at which people find and lose jobs Economic forces influence the rates of job findings and job separation Unemployment Rate – Fraction of labor force that has no job Median unemployment rate = 5.4% (1890-1996) Mean unemployment rate = 6.4% The Household Survey The unemployment rate measures the percentage of the labor force that is unemployed: Number of unemployed x 100 Unemploym ent rate Labor Force The labor force participation rate measures the percentage of the working-age population that is in the labor force: Labor force x 100 Labor force participat ion rate Working - age population Measures of Price Level & Inflation Implicit GDP price deflator = Nominal GDP x 100 Real GDP Real GDP = Nominal GDP x 100 Implicit GDP price deflator By dividing nominal GDP by the implicit GDP price deflator we effectively deflate nominal GDP to determine real GDP “Implicit” deflator because it is not calculated explicitly Paasche index Consumer Price Index (CPI) Explicit index because it is calculated directly Based on fixed market basket of 364 consumer goods Laspeyres index Social security payments and federal income tax brackets adjust automatically to changes in the CPI Because of substitution bias, the CPI overstates inflation by 1 percentage points per year Substitution bias: changing supply conditions => change relative prices => HHs purchase cheaper good Measuring Inflation BASE YEAR (1999) PRODUCT 2006 QUANTITY PRICE EXPENDITURES PRICE 2007 EXPENDITURES PRICE EXPENDITURES Eye examinations 1 $50.00 $50.00 $100.00 $100.00 $85.00 $85.00 Pizzas 20 10.00 200.00 15.00 300.00 14.00 280.00 Books 20 25.00 500.00 25.00 500.00 27.50 550.00 Total 750.00 FORMULA Expenditur es in the current year CPI = Expenditur es in the base year 100 900.00 APPLIED TO 2006 $900 100 120 $750 915.00 APPLIED TO 2007 $915 100 122 $750 Unanticipated and Anticipated Inflation There are two different kinds of inflation: Unanticipated inflation: An increase in the price level that comes as a surprise, at least for most individuals. Anticipated inflation: A widely expected change in the price level. Effects of Inflation High and variable rates of inflation are harmful for a number of reasons: Because unanticipated inflation alters the outcomes of long-term projects like the purchase of a machine or operation of a business, it will both increase the risks and retard the level of such productive activities. Inflation distorts the information delivered by prices. People will respond to high and variable rates of inflation by spending less time producing and more time protecting their wealth and income from the uncertainty created by inflation. What Causes Inflation? Nearly all economists believe that rapid expansion in the money supply is the primary cause of inflation.