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A Case Study
The September Unemployment Rate
Date Of Announcement
December 7, 2001
Dates Of Future Announcements
Economic Case Studies (as December 7, 2001)
Inflation
-0.3% monthly increase in the CPI
October 2001
Unemployment
5.7% in October 2001
Real GDP
-1.1% annual rate of change
3rd quarter, 2001
Productivity
+1.5% annual rate of increase
3rd quarter, 2001
International
Trade
The trade deficit decreased in
September.
January 4, February 1, and March 8, 2002
Announcement
The unemployment rate for the month of
November 2001 was 5.7 percent, up a sharp
0.4% from September. The number of
individuals employed decreased by 331,000.
The original press release is available at:
http://www.bls.gov/news.release/empsit.nr0.htm.
Federal Reserve The FOMC lowered the target
federal funds rate on November 6.
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most recent case studies.)
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 communities in
which they live. Those costs are explored in this case study.
Changes in levels of employment are also included in the announcements and
are equally important indicators of the direction of the U.S. economy.
This particular announcement will receive additional attention as it is a large
increase in unemployment, combined with the recent announcement and new
stories about the current recession.
Goals Of The Unemployment Case Study
The purpose of this case study is to report the unemployment and employment
announcement, 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 and discussion of
the definitions 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.
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The case offers an opportunity to enhance our understanding of the relevance
of the announcements and one of the more important challenges economic
policymakers face.
Data Trends
The unemployment rate in November continued to rise to reach its highest
level since August 1995. In November, employment decreased for the fifth time
in seven months.
In each of the years 1999 and 2000, employment grew by 2.8 million persons,
as approximately 155,000 more people were employed each month. During the
first quarter of 2001, employment was still growing with 220,000 more people
employed each month. These recent additions were part of a trend that added
employment of over 15 million more people during the last decade. In March of
2000, employment reached a peak and has fallen in all but two months since.
Figure 1
Since the last recession in 1990-1991, unemployment had been in a steady
decline. A year ago, unemployment hovered at a low of 3.9 percent, Almost two
percent less than this November. In April 2001, the unemployment rate began to
increase and 522,000 jobs were lost between April and September. In October
2001, the number of jobs decreased by another 468,000 to 937,000 jobs lost. In
November that number jumped another 331,000. Employment was down across
almost all categories, with the most notable exception being the health services
industry, which grew by a robust 32,000 jobs in November. Job losses were most
prominent in the manufacturing sector (163,000 jobs), services (70,000), and
transportation (54,000).
Figure 2
Importance Of The Changes
Unemployment in the United States again rose sharply in November.
In newspapers and magazines and on television news, much has been
written and said about the U.S. recession that began in March of 2001.
The references are to the slowing growth in consumer spending, falling
investment spending, and resulting cutbacks in production and
employment. The rapid increase in the unemployment rate from 4.9 to 5.4
percent during October and the further increase in November, as well as
the decrease in the number of people employed this month is one result of
those changes in spending.
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In May of 1999, the Federal Reserve began a policy of slowing the rate
of growth in the money supply and creating increases in short-term
interest rates. That restrictive monetary policy lasted through the Federal
Reserve meeting on November 15, 2000. The goal was to slow the rate of
growth in spending in the economy to be more in line with the growth in
capacity and thereby eliminate potential inflationary pressures. During the
last two quarters of 2000 the growth in real GDP began to slow,
unemployment rose from October 2000 to November 2001, and the
increase in the number of jobs began to slow early in the period, falling
since March of 2001.
The restrictive policy changed with the December 2000 Federal
Reserve meeting, after which the Federal Reserve announced that current
“risks are weighted mainly toward conditions that may generate economic
weakness in the foreseeable future." The Federal Reserve then began to
respond to slowing spending growth and the increasing potential for a
recession by reducing the target federal funds rate by 450 basis points
(4.5%) from January 2001 to November 2001.
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. 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
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 4.1 to 31.2 percent.
Table 2
Unemployment rates for states and cities are released with a greater lag than
the national data. In September 2001, North Dakota had the lowest unemployment
rate of 2.0%, followed by Nebraska and Delaware at 3.0%. The highest levels of
unemployment were experienced in Washington (6.6%), Oregon (6.5%), Nevada
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(6.3%) and the District of Columbia (6.3%). But rates vary even more by city.
Fargo, ND had the lowest unemployment rate of 1.1%, followed by Bismark, ND
(1.2%), College Station, TX, Grand Forks, ND (1.5%) and Columbia, MO (1.6%).
Among the highest rates in the country are McAllen/Edinburg/Mission, TX
(10.8%), Fresno, CA (11.5%), and Visalia/Tulare/ Porterville, CA (13.9%). Of
the nine geographical areas of the country identified by the Department of Labor,
the area including Iowa, Kansas, Minnesota, Missouri, Nebraska, North Dakota,
and South Dakota had the lowest unemployment rate at 3.5 percent and the region
including Washington, Oregon, California, Alaska and Hawaii had the highest
with 5.5 percent.
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 workers,
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, which 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 part, from tax
revenues. Therefore, unemployment compensation spreads out the cost of being
unemployed among tax payers, 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.
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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 is also a essential indicator of progress in the economy. The two
pieces of data even show different trends in some cases. The headlines describing
this month’s announcement will report a rising unemployment rate combined with
a significant fall in employment.
Figure 3 shows that growth in employment started to slow in the middle of
2000 and has actually decreased in two months in 2000 and in six of the last eight
months in 2001. As growth in spending has slowed and became negative in the
third quarter, businesses have 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. The current
recession has been defined as starting in March and that is when employment
reached its most recent high point.
Figure 3
Employment, Wages And Inflation
In November 2001, average hourly earnings for private sector workers
increased by 5 cents to $14.52. Over the past twelve months, average hourly
earnings rose by 3.9% and average weekly earnings rose by 3.3%. The weekly
earnings rose by less than the hourly earnings, as the number of hours worked by
the average worked decreased.
To a worker, wages represent a quantity of goods and services that can
purchased by an hour’s labor. To employers, wages represent the cost of labor. In
addition to wages 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
and if these costs are passed on to the consumer in the form of higher retail prices,
they represent inflationary pressures in the economy.
When the economy enters an economic slowdown, companies cut back on
production and on the number of people employed. As workers are laid off, the
pool of available workers increases. When unemployment increases, the upward
pressure on wages and the price level are reduced.
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Economists, journalists, and the staff of the Federal Reserve often refer to the
Non-Accelerating Inflation Rate of Unemployment (NAIRU). While there are
some technical and potentially significantly differences, other terms like full
employment, high employment, and the natural level of unemployment are used
almost interchangeably to refer to the same relative economic conditions.
The amount of unemployment at the NAIRU level is difficult to quantify,
primarily because the rate changes and we do not know its level until the
economy is experiencing inflationary pressures. Therefore, the NAIRU level is
better thought of as actually a range of unemployment levels at which the price
level remains stable. Above and below this range, the economy will experience
acceleration and deceleration of prices changes.
Another common, sometimes confusing, term is the full-employment rate of
unemployment. What that really means is that the only unemployment that exists
is due to friction in labor markets and structural changes in the economy.
Examples of frictional unemployment are unemployment resulting from
individuals quitting jobs and looking for new ones, people getting fired and
quickly finding new jobs, and students graduating and looking for jobs. It is
normal in the sense that even in very good times, people will find jobs soon, and
there will be a small number at any one time. There may be some individuals
whose skills simply do not match any available openings and it may be a lengthy
time before they are able to find positions. That is described as structural
unemployment.
Federal Reserve Board Actions
The Federal Reserve’s report on economic conditions across the country is
released in the “Beige Book” (named for its beige cover) two weeks prior to each
meeting of the Federal Reserve Open Market Committee. The following are
excerpts from the Beige Book released on November 28, 2001, in preparation for
the Open Market Committee meeting on December 11, 2001.
“Reports from the Federal Reserve districts indicate that economic activity
generally remained soft in October and the first half of November, with
evidence of additional slowing in most regions outweighing signs of recovery in
a few districts. Manufacturing activity weakened further, with declines in
production, new orders and employment widely reported. Consumer spending
was mixed--aggressive financing incentives drove automobile and light truck
sales to exceptional levels, but tourism remained weak and nonauto sales were
spotty, with stronger sales growth in some areas offset by weaker sales
elsewhere. Prices were generally stable, although lower prices were in evidence
for automobiles, gasoline, and computers. In contrast, prices for insurance and
health care rose sharply.
“Labor markets continued to ease in most districts. Extremely weak labor market
conditions were reported by a major employment agency in the New York district.
Employment in New York City was reported to have fallen by more than 70,000 in
October. Boston reported widespread weakness in the temporary employment industry;
industry revenues were 30 to 40 percent lower than a year ago. Cleveland and Richmond
also reported weak or slowing demand for temporary workers. In Cleveland, some
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industries were trimming employment as a result of the after effects of September's
terrorist attacks while layoffs continued in Minneapolis and Dallas.
“In Boston, temporary employment agencies reported that clients were increasingly
seeking reductions in billing rates for temporary workers, but profit margins were being
maintained and wages were holding steady. Wages were slightly lower at small firms and
generally flat at larger firms in the New York district. In Cleveland wage pressures eased,
reportedly because workers were more uncertain about job security.
The original press release is available at: http://www.federalreserve.gov/
FOMC/BeigeBook/2001/20011128/default.htm
Between January and November 2001, the Federal Reserve's Open Market
Committee decided to lower the target federal funds rate 10 times, for a total
decrease of 4.5% in the target federal funds rate. The discount rate was also
lowered each time. Below is an excerpt from their November 6, 2001 meeting
press release.
“Heightened uncertainty and concerns about a deterioration in business
conditions both here and abroad are damping economic activity. For the
foreseeable future, then, the Committee continues to believe that, against the
background of its long-run goals of price stability and sustainable economic
growth and of the information currently available, the risks are weighted mainly
toward conditions that may generate economic weakness.”
“Although the necessary reallocation of resources to enhance security may
restrain advances in productivity for a time, the long-term prospects for
productivity growth and the economy remain favorable and should become
evident once the unusual forces restraining demand abate.”
The original press release is available at:
www.federalreserve.gov/BoardDocs/Press/General/2001/20011106/default.htm
Case Study
1. What are the key parts of the unemployment announcement?
2. What are the relevant economic concepts?
3. What does this mean for workers?
What does this mean for employers?
4.
How will the Federal Reserve decision-makers likely react?
Sample Answers To Case Study Questions
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1. The unemployment rate increased in November to 5.7%. This is the second
consecutive large increase. The growth in the number of jobs had been slowing late
last year and into the early part of 2001 and reached a peak in March of 2001. The
number of jobs decreased again this month, for the fifth time in the last seven months.
Hourly wages increased slightly. There are many news reports of individual
companies laying off workers, slowing growth in sales of retail companies, and
continuing falling employment in manufacturing.
2. Rate of unemployment; growth in labor force; the NAIRU level of real GDP; and
inflation.
3. Hourly earnings showed modest increases in most of the country. Unemployment is
still low compared to most of the 1990s, but it is becoming more difficult for many
individuals to find employment. The rate of growth in real GDP has been slowing
and fell in the third quarter of the year. Employment is decreasing.
Pressures on the labor market have eased significantly over the past 12 months. In
most sectors of the economy, it is no longer difficult for employers to hire workers
and therefore the upward pressures on wages are abating.
4. The Federal Reserve can increase, decrease, or not change the target federal funds
rate. (The federal funds rate is the interest rate banks charge one another for shortterm loans of reserves. The target is the goal the Federal Reserve sets as appropriate,
given its monetary policy intentions.)
Decreasing the target federal funds rate would likely increase investment and
consumption spending and eventually result in expanded employment (and increase
inflationary pressures and decrease unemployment).
Increasing the target federal funds rate would likely decrease the rate of growth in
investment and consumption spending. A decrease in growth in spending would be
intended to reduce rates of increases in wages and prices, slow the growth in
employment, and perhaps increase unemployment.
At the November 2000 meeting, the Federal Reserve was concerned with potential
inflation and stated that it was leaning toward increasing interest rates in the future. In
December, however, the Federal Reserve was much more concerned with the smaller
increases in spending and the potential of decreases in spending and a resulting
increase in unemployment. That concern was the basis for the decreases in interest
rates announced between January and October 2001.
Classroom 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).
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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?
Other Questions about Unemployment
Describe the differences among unemployment rates for high school
dropouts and college graduates, whites and minorities, and adults
over 25 and teenagers.
The unemployment rate rose to its highest level in almost five years. The
demographics of the unemployment rate reveal that ranges by educational attainment,
from a low of 2.7 for college graduates to a high of 7.7 for workers who have not
completed high school. (See the original Department of Labor announcement tables http://www.bls.gov/news.release/empsit.nr0.htm.) The unemployment rate is lower for
whites than minority groups and lower for people over the age of 25 than it is for
teenagers (table 2).
How long does unemployment last for typical unemployed
individuals?
The mean duration of unemployment is 13 weeks. The median duration is 7.4 weeks.
A sizable number of unemployed workers who are unemployed for over 15 weeks account
for this difference between the mean and the median. (Teachers should note that this is
an opportune time to discuss the significance of using the mean and median as measures
of an average.) Forty-one percent of September’s unemployed individuals were
unemployed for five weeks or less; 33 percent were unemployed for 5 to 14 weeks; and 26
percent were unemployed for 15 weeks or more. Eleven percent (included in the last
group) were even unemployed for more than half of a year.
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Why did individuals become unemployed during the month?
Thirty-eight percent of the unemployed workers were permanently laid off; 17 percent
were temporally laid off. (Both of those percentages have been increasing.) Twentyseven percent were coming back into the labor force after a period of not looking for jobs
and not having a job. Individuals leaving jobs accounted for 11 percent of the
unemployed and six percent were new entrants. These latter numbers have been
declining over the last several months.
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)
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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
Daniel Solomon
Vanderbilt University
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