A Case Study
Unemployment and Employment
In May, 2005
Date of Announcement
June 3, 2005
Unemployment
rate decreases to
5.1 percent.
Date of the next Announcement
July 8, 2005
Employment
continues to
increase but at a
slower than
expected pace.
An increase of
78,000 jobs.
[SLOPES OF ARROWS ARE IMPORTANT – THE HORIZONTAL
UNEMPLOYMENT ARROW INDICATES NO CHANGE IN
UNEMPLOYMENT. THE STEEP SLOPE OF THE EMPLOYMENT
ARROW INDICATES A SIGNIFICANT RISE IN EMPLOYMENT.]
Announcement
The unemployment rate for the month of May was 5.1 percent, down from 5.2
percent in April. Total employment increased by 78,000 in May. The relatively
small increase in employment has received the most attention in the news.
The original press release is available at:
http://www.bls.gov/news.release/empsit.nr0.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 costs of
unemployment and the definitions of frictional, structural, and cyclical
unemployment are discussed.
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Interactive Questions
Some months the unemployment rate falls and the number of employed falls; other
months the unemployment rates rises while the number of employed rises. This month,
unemployment rate fell slightly and the number of unemployed rose by less than expected
and by less than the amount necessary simply to provide enough jobs over time for
expansion in the working age population. See if you can explain these events.
1.
How is it possible, if it is possible, for employment to increase by a relatively
small amount and the unemployment rate to decrease?
a. Labor markets are expanding rapidly
b. Labor markets are expanding slowly
c. It is not possible for both events to happen
d. It is likely a mistake has been made in the data collection
An answer. [This should pop up.]
Labor markets
are expanding
slowly
If labor markets are expanding slowly, there may not be many new entrants
into the labor force. If a higher percentage of those entrants get jobs or if
currently unemployed individuals get jobs, the unemployment rate can fall.
This is what happened in May.
2. How is it possible, if it is possible, for employment to increase and the
unemployment rate to increase?
a.
b.
c.
d.
the economy is doing quite well
the economy is doing quite poorly
it is not possible for both events to happen
it is likely a mistake has been made in the data collection
An answer. [This should pop up.]
It may happen
when the
economy is
doing well.
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If employment increases and the unemployment rate increases, the number of
unemployed must have increased at a faster rate than the number of employed.
This could happen when there are many new entrants all with the expectations
that conditions are improving.
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 plus the number of
people employed equals 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. For example,
students over 16, who choose to not work, and retirees are not in the labor
force, and therefore not counted in the unemployment rate. Both are counted
as part of the working age population in table 1.
Table 1
Note to teachers. The number of individuals employed reported in this table
differ 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.
A Caution
As discussed later in the case, the increase in the number of employed individuals
has increased by a smaller than expected amount and by an amount that will not
provide sufficient jobs to provide for population growth.
However this is a single month change and does not necessarily indicate a change
in the trend. In the last fifteen months, employment has been growing by an average
of 192,000 jobs per month. That is rapid enough to provide new entrants jobs and to
bring down unemployment rates. While this month’s relatively small increase is
receiving attention in newspapers, it does not necessarily signal a change in the trend.
We should always be cautious about a single month’s change in any of the economic
data we study.
Relevance of Unemployment Announcements
The monthly unemployment announcements receive headline treatment almost
every month. Changes are significant indicators of national economic conditions and
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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 later in this case study.
Changes in levels of employment are also included in the announcements and
have increasingly received more attention. The employment data are equally, perhaps
even more, important indicators of the direction of the U.S. economy.
Part of the reason for the new focus on employment has been the recent history of
employment. Employment reached a peak in February 2001, just before the
beginning of the most recent recession. The recovery from the recession has often
been described as a jobless recovery as it has taken a relatively long time for the
number of jobs to return to its previous high. We only did so in January of 2005. See
figure 1.
Figure 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 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.
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.
Data Trends
The trend over the 1990s, since the recession in 1990 - 1991 and up to the 2001
recession, was a decrease in the unemployment rate and an increase in employment.
Employment expanded by over 15 million jobs during that decade and unemployment
fell from 7.8 percent to 3.8 percent.
Figure 2 shows the rise in unemployment associated with the two recessions in
1990/1991 and 2001 with the almost decade long fall in unemployment in between.
Unemployment reached a high following each recession of 7.8 percent in 1992 and
6.3 percent in 2003.
Figure 2
At its low in 2000 prior to the most recent recession, unemployment equaled 3.8
percent. From March 2001 to the summer 2003, however, the trend was reversed generally one of increasing unemployment rates and decreasing employment. Figure
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3 focuses on unemployment just prior to, during, and following the most recent
recession.
In the summer of 2003, unemployment rates began to fall gradually and have
come down slightly more than one full percentage point. The unemployment rate in
May (5.1 percent) continues a very gradual fall since the beginning of the year.
Figure 3
Figure 4 shows the even higher unemployment rates during the recessions in the
1970s and early 1980s, reaching a high for the last 50 years of 10.8 percent in
November and December of 1982.
Figure 4
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 failure of employment to increase at the same rate as population growth
ultimately means higher unemployment or lower labor force participation. Estimates
of the number of new jobs needed each month simply to provide new entrants with
jobs and not have unemployment rates increase is between 125,000 and 150,000.
In some months during and following the recession, the labor force 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.
Much of the fall in employment from 2001 to 2003 was in manufacturing.
Blame in the press is often placed on competition from firms abroad and due
to U.S. firms locating new and existing plants abroad. Such conditions often
lead to controversies about the effectiveness of international trade and result
in increased pressures to establish barriers to trade. While trade is partially
responsible, larger influences were the lingering effects of the recession and
continuing increases in productivity. See the most recent International Trade
case.
Figure 5
Figure 5 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 has grown since. (See the most
recent GDP case study.)
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Employment has been increasing since the summer of 2003 and for the last year
has been increasing at rates fast enough to begin to lower unemployment rates and to
provide new jobs for new entrants into the job market.
Total nonfarm payroll employment (seasonally adjusted) rose by 78,000 in May
to more 133 million jobs. The increase in employment in the last year has averaged
more than 200,000 jobs per month and that is sufficient to keep unemployment rates
falling.
The largest increases in jobs in May were in services, particularly in education
and health services and in retail trade. Construction employment also increased.
Manufacturing jobs continued to fall.
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 4.4 for adult men to 17.9 percent
for teenagers.
Table 2
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 employment in your area growing at a higher, lower, or roughly the same
rate as the national average?
2. What factors contribute to your area’s growth or lack of growth?
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 jobs this summer?
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.
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One observer has said that even though the overall unemployment rate is 5.1
percent, it is 100 percent for a person who does not have a job. The intention of the
statement is to emphasize how serious unemployment can be for individuals.
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. Average standards of living are lower
as a result.
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. It is the type of unemployment we
experienced as a result of the recession four years ago.
At the levels of unemployment that economists consider to be the lowest possible
sustainable levels, the only unemployment that exists is due to friction in labor
markets and structural changes in the economy.
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?
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4. What should monetary policy be, given the changes this month?
Sample Answers to Case Study Questions
1. The unemployment rate fell slightly.
Employment increased once again this month, but less than the amount necessary
to maintain low unemployment rates over time
2. The rate of unemployment, the amount of employment, and the change in labor
force.
3. Employment is rising but did not rise rapidly enough to provide jobs for new
workers entering the work force. If this rate of growth in employment would
continue, unemployment rates are likely to rise.
4.
(See the most recent Federal Reserve case study.) A one month’s change in
employment growth should not change monetary policy. Monetary policy has
been one of raising target interest rates and slowing the growth of the money
supply in order to reduce the amount of economic stimulus of recent policy.
If the change in the growth of the number of employed this month would continue
for several months it would indicate that monetary policy should change to one
that is more stimulative.
Other Interactive questions
In questions 1 through 5, answer each question assuming that the current employment
in a country equals 130 million and that current unemployment equals 7 million.
1. What is the approximate unemployment rate in the economy described in the
question?
5.1 percent
5.4 percent
7.0 percent
Some other amount
2. What will happen if very few people enter the labor force next month because they are
discouraged by this month’s increase in the number of jobs, yet the number of people
employed increases by more than the increase in the labor force? The unemployment
rate will:
Increase
Decrease
Not change
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3. If 200,000 people enter the labor force and 180,000 find jobs and nothing else
changes, what will happen to the number of unemployed?
Increase
Decrease
Not change
What will happen to the unemployment rate?
Increase
Decrease
Not change
4. If 100,000 individuals enter the labor force and 97,000 find jobs and nothing else
changes, what will happen to the number of unemployed?
Increase
Decrease
Not change
What will happen to the unemployment rate?
Increase
Decrease
Not change
Answers
1. The unemployment rate under these assumptions is 5.1 percent. It is calculated by
dividing the number of unemployed by the size of the labor force.
(7 million) / (7 million + 130 million) = 5.1 percent. If a student chose 5.4 percent,
the student was dividing 7 million by 130 million. If a student chose 7 million,
presumably the student was just converting the 7 million into a percentage or
rounding the result off to the nearest percentage point.
2. The unemployment rate will decrease. As very few people enter the market, the labor
force increases by a small amount. The number employed increases by an even
larger amount. Thus the unemployment rate decreases.
3. The number of unemployed will increase by 20,000.
The percentage of the new additions to the labor force who are unemployed is 10
percent. That will cause an increase in the overall unemployment rate. The labor
force has increased and the number of unemployed increased.
If a student actually calculates the unemployment rate and rounds off to the nearest
one-tenth, the rate does not change.
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3. Unemployment will rise by 3,000 individuals.
The unemployment rate will fall. The percentage of the new labor force participants
who are unemployed is 3 percent. Because that is less than the current
unemployment rate of 5.1 percent, the overall unemployment rate will fall slightly.
If a student actually calculates the unemployment rate and rounds off to the nearest
one-tenth, the rate does not change.
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)
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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
Vanderbilt University
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