A Case Study
The April Unemployment Rate
May 5, 2006
Date of Announcement
May 5, 2006
The unemployment
rate did not
change.
Date of the next
Announcement
June 2, 2006
Employment
increases.
An increase of
138,000 jobs.
[SLOPES OF ARROWS ARE IMPORTANT – THE FLAT SLOPE
OF THE UNEMPLOYMENT RATE INDICATES NO CHANGE IN
THE UNEMPLOYMENT RATE. THE SOMEWHAT UPWARD,
EMPLOYMENT ARROW INDICATES A RISE IN
EMPLOYMENT.]
Announcement
The unemployment rate for the month of April was 4.7 percent.
Total employment rose by 138,000 in April.
The original press release is available at:
http://www.bls.gov/news.release/empsit.nro.htm.
Teachers' Notes
1
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.
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
2
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.
[Insert the following interactive exercises here]
1. What is the approximate current rate of unemployment?
2%
3%
4%
5%
6%
If 5% is chosen, then this box should pop-up Yes, that is correct. April
unemployment was 4.7%.
If 4% is chosen, then this box should pop-up –
No, that is not correct. See if
you can round off the actual
unemployment rate.
If one of the others is chosen, then this box should pop-up –
No, that is not correct. Look
back in the beginning of the
case study.
2. Is this high or low relative to unemployment rates last year?
High
About the
same
Low
If “low” is chosen, then this box should pop-up Yes, that is correct. April
unemployment was below the
unemployment rates of last year.
3
If one of the others is chosen, then this box should pop-up –
No, that is not correct. April
unemployment was below the
unemployment rates of last year.
Teachers - answers to interactive questions.
1. Approximately 5 percent (actually 4.7 percent).
2. Compared to last year, current unemployment has slightly decreased.
During 2005, the unemployment rate was 4.9 percent or higher for
the entire year – mostly above 5.0 percent.
Data Trends
Unemployment rates have been steady this year. The previous
three months have experienced unemployment rates of 4.7 or 4.8
percent. Those rates are below those of 2005 when the average rate
was 5.0 percent and significantly below the average rate of 5.5
percent in 2004.
The trends from the beginning of the 1990s to the 2001 recession
were a decrease in unemployment and an increase in employment.
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.
Figure 1
4
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. Unemployment rates since reaching a high of 6.3 percent
in June of 2003 slowly and relatively steadily decreased.
Figure 2
Relevance of Unemployment Announcements
The 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.
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.
Announcements of increases in employment have been receiving
increased attention. From the recession in 2001 through the year
2004, the economy had not generated sufficient numbers of new jobs
to provide new labor market entrants with jobs.
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 4.2 for adult males to 14.6 percent for teenagers.
Table 2
Explanations of differences in unemployment rates among groups
of individuals and parts of the country are differences in economic
conditions, education levels, skills and experience, and discrimination.
5
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, perhaps even more important, indicators of
progress in the economy. The failure of the economy to increase the
number of jobs as rapidly as we experienced in the 1990s has been of
particular interest and concern.
If employment does not increase at the same rate as population
growth ultimately means the economy will experience higher
unemployment or increasing numbers of individuals will leave the labor
force.
Since the beginning of 2004, employment has been on an upward
trend at rates that will provide sufficient jobs for new entrants and
that trend has continued during April.
Total nonfarm payroll employment (seasonally adjusted) rose by
138,000 in April to more than 135 million jobs. This follows a revised
rate of increase of 200,000 jobs in March.
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 and had continued to grow since.
Figure 4 shows the monthly change in employment. If the same
percentage of adults are to have jobs, employment needs to grow by
somewhere between 125,000 and 150,000 per month.
Figure 4
6
Interactive Interpretation of Data
Often changes in unemployment rates can be confusing as workers’
and potential workers’ expectations change. See if you can determine
the effects of the following events on unemployment rates.
1. Suppose the economy is just coming out of a recession. Workers
and potential workers become very optimistic about the
possibilities of finding new better jobs and for those who do not
have jobs finding a good job at all. The unemployment rate will:
Increase
Decrease
Could either
increase or
decrease
If the answer chosen was “increase” or “could either…”-
Correct. The unemployment rate may
increase as more people become
unemployed because they believe they
could find a job.
If the answer chosen was “decrease” That is not correct. The unemployment
rate may increase as more people
become unemployed because they
believe they could find a job.
7
2. Suppose the economy is entering into a recession. Workers and
potential workers become very discouraged about the possibilities
of finding new better jobs and for those who do not have jobs a
good job at all. Current workers do not give up their current jobs
to look for new ones and other potential workers give up looking
for jobs as they do not believe they will find them. The
unemployment rate will:
Increase
Decrease
Could either
increase or
decrease
If the answer chosen was “decrease” Correct. The unemployment rate may decrease as
more people leave the labor force and fewer
people quit jobs because they believe they could
not find a new job.
If the answer chosen was “increase” or “could either” That is not correct. The unemployment rate
may decrease as more people leave the labor
force and fewer people quit jobs because they
believe they could not find a new job.
In each of these instances, the challenges of interpreting changes
in unemployment rates under all conditions are significant. In both
cases, the unemployment rate moved in a direction that may seem to
be counterintuitive. The primary lesson to take away is to be cautious
with unemployment data and the interpretation of the data.
8
The Costs of Unemployment
There are significant personal costs to unemployment and these
are the easiest to understand. Unemployed workers often do not have
the income to support themselves or their families. The stress of
being unemployed is reflected not only through the financial
challenges of paying regular ongoing bills, but also 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 unemployment compensation provided to
many unemployed workers. Because most workers pay the taxes that
fund the unemployment compensation, the cost of being unemployed is
spread among taxpayers, instead of having the entire burden fall on
the unemployed workers alone.
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 of
increases in unemployment.
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 those who are
graduating and just entering the job market. Some frictional
unemployment 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
9
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.
At the levels of unemployment that economists consider to be the
lowest possible sustainable levels (discussed below), the only
unemployment that exists is due to friction in labor markets and
structural changes in the economy.
Full employment
Economists define the approximate unemployment rate with no
cyclical unemployment as full employment. If unemployment falls to
level below the full employment rate, there will be upward pressure on
wages and prices. If unemployment rises to a very high rate, there
will downward pressure on wages and prices or wages and prices will
remain steady. In the middle is a level, or more likely a range, where
there is not pressure on wages and prices to rise or fall.
Economists do not know for certain what that rate or range is and
even if they did, it does change over time. A consensus estimate is
that the full employment rate of unemployment is currently between
4.5 and 5.0 percent of the labor force being unemployed.
Interactive questions –
1. If unemployment falls to a very low rate, what is likely to happen to
wages?
Increase
Decrease
Not Change
10
If the choice is “increase” –
That is correct. With few people
unemployed, employers may have to offer
higher wages in order to attract new and
keep current employees.
If the choice is either “decrease” or “not change” –
That is not correct. With few people
unemployed, employers may have to offer
higher wages in order to attract new and
keep current employees.
2. If unemployment falls to a very low rate, what is likely to happen to
prices?
Increase
Decrease
Not Change
If the choice is “increase” –
That is correct. As wages increase,
employers may have to raise their prices to
pay the increased costs of producing.
If the choice is either “decrease” or “not change” –
That is not correct. As wages increase,
employers may have to raise their prices to
pay the increased costs of producing.
11
3. If unemployment rises to a relatively high rate, what is likely to
happen to wages?
Increase
Decrease
Not Change
If the choice is “decrease” –
That is correct. With more people
unemployed, employers may have to offer
lower wages and employees may become
more willing to accept lower wages.
If the choice is either “increase” or “not change” –
That is not correct. With more people
unemployed, employers may have to offer
lower wages and employees may become
more willing to accept lower wages.
4. If unemployment rises to a relatively high rate, what is likely to
happen to prices?
Increase
Decrease
Not Change
12
If the choice is “decrease” –
That is correct. As wages decrease,
employers may be forced to lower their
prices due to competition. Or at least
there is not the pressure to raise prices.
If the choice is either “increase” or “not change” –
That is not correct. As wages decrease,
employers may be forced to lower their
prices due to competition. Or at least
there is not the pressure to raise prices.
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
13
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)
14
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
15