A Case Study
The August Unemployment Rate
Date of Announcement
September 5, 2003
Date of the next Announcement
October 3, 2003
Announcement
The unemployment rate for the month of August was 6.1 percent, a slight
decrease from the 6.2 percent in July. Total employment fell by 93,000 in
August. The fall in employment has received the most attention in the news.
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.
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
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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.
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, 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
At its low in December 2000, unemployment equaled 3.9 percent. Since
March 2001, the trend has generally been one of increasing unemployment and
decreasing employment. The unemployment rate in August (6.1 percent)
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decreased from the previous month’s rate of 6.2 percent. This is a decrease from
the nine-year high in June of 6.4 percent.
Total nonfarm payroll employment (seasonally adjusted) fell by 93,000 in
August to a little under130 million. The largest job decline in August occurred in
manufacturing. Construction and education and health services employment
increased slightly.
Over the past 2 years, government employment has trended upward, while
private sector employment trended downward, with particularly large falls in
manufacturing employment. Recently, budget problems have lowered the rate of
job growth in state and local governments and actually caused a decrease during
August.
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 are to the slowing growth in consumer
spending, falling investment spending, and resulting cutbacks in
production and employment. The increase in the unemployment rate from
3.9 percent to the current 6.1 percent, as well as the decrease in the
number of people employed, are the results of those changes in spending.
Employment reached a peak in March 2001. We have almost 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
individuals, with unemployment rates ranging from 5.8 for adult women to 16.6
percent for teenagers.
Table 2
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
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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
the economy. 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 August, 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.
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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.
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.
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 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.
Employment, Wages, and Inflation
In August 2003, average hourly earnings for private sector increased 2 cents
$15.45. Average weekly earnings increased by one-tenth of one percent in
August to $519.12 in spite of the fact that average weekly hours declined.
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
and 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.
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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.
At the NAIRU level of unemployment discussed above, 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?
Sample Answers to Case Study Questions
1. The unemployment rate decreased slightly to 6.1%. Employment decreased once
again this month. Hourly and average wages increased slightly this month.
2. The rate of unemployment and the change in labor force.
3. Hourly earnings increased slightly. Given that the labor force is decreasing, some
potential workers may be more pessimistic about the possibility of finding a job.
Interactive Questions
1. If 100,000 individuals lose their jobs in a month and all of them drop out of the
labor force, what happens to the unemployment rate?
2. If productivity (output per worker) increases by five percent in a year, real GDP
rises by three percent, and the labor force increases by one percent, what happens
to unemployment?
3. What is the most important cost of unemployment?
4. Why are changes in levels of employment just as important as changes in
unemployment?
Answers to interactive questions.
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1. The unemployment rate rises. But be careful. You may have selected the correct
answer for an incorrect reason. The actual number of unemployed stays the
same. The labor force (the employed part) declines. Thus the unemployment rate
increases even though the number of individuals counted as unemployed did not.
2. Unemployment increases by approximately three percent. To some extent this is
currently happening. As the labor force grows through population growth, real
GDP has to go if new workers are to find jobs. In this case, fewer workers are
actually needed as spending is growing more slowly than productivity. Two
percent fewer workers are needed to produce the new level of real GDP (five
percent – three percent). Plus an additional one percent of the labor force enters.
Thus, unemployment increases by approximately three percent.
3. There is not necessarily a correct answer here. Obviously if it is you or a member
of your family who is unemployed, the cost is great to you. Some of that cost is
borne by unemployment compensation. But even if unemployment does not
directly affect you, our economy is losing output that we could have had and thus
we are not as well-off as we could possible be.
4. Growth in employment is one sign that businesses are expanding production and
sales. In addition, as the population grows, it is likely the labor force will also
grow. Without an increase in employment that equals the growth in the labor
force, unemployment will eventually increase.
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?
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.
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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)
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)
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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
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