Principle 8: Fiscal and Monetary policies influence people’s decisions
Objectives
Identify workers who are and are not in the labor force
List the flaws of the unemployment rate as an indicator of the strength of the labor market
Distinguish the two major labor market indicators
Define three different types of unemployment
Use FRED to describe different recessions
Why do you want to know this?
Employment affects income, consumer spending, and wages; this information is essential in estimating where the economy is and where it is going. More importantly for you, the state of the labor market affects your ability to find work. Finding a job in times of high unemployment is more difficult than in better times. You do want to understand this!
The two reports
Most people would agree that everyone who is willing and able to work should be able to find a job. Next to the GDP, employment is the most watched report. The report is composed of two surveys, the Household Survey and Establishment Survey. Together, these reports present a picture of the employment situation in the economy.
The civilian unemployment rate is reported in the Household Survey. The Bureau of Labor Statistics calls about 55,000 households and asks them specific questions to determine their employment status. Once the data is collected, the unemployment rate is calculated.
The labor force consists of all people between the ages of 16 and 65 who are either working or actively seeking work. To be counted in the labor force, a person must be 16 years or older, working, or available and actively seeking work. So the unemployment rate is simply:
number of people unemployed
total number of people in the labor force
[Caution: when talking about unemployment, it is important to emphasize that the calculations only include the number of people actively looking for work divided by the number of people in the labor force, not everyone in the population.]
There are many problems with using this measurement as an indicator of the strength or weakness of the labor market. A mother who wants to work but can’t afford daycare would not be considered part of the labor force. Part-time workers who are looking for a full time job are considered employed. And there are many more idiosyncrasies that make the unemployment rate less than ideal as an indicator of how the economy is doing.
Another number that indicates the strength or weakness of the labor market is the change in nonfarm payroll employment. This information is taken from the Establishment Survey. Each month, about 300,000 establishments, employing about one third of all payroll workers, submit their reports to the Bureau of Labor Statistics. In addition to the change in employment, the report also includes average workweek, average hourly earnings, and overtime.
When economists talk about full employment, they don’t mean that 100% of the labor force is employed. If this were the case, no one would be changing jobs. At any point in time, some people will be out of work because they are moving to a better job. This type of unemployment is called frictional unemployment and it is not considered a problem because it is an indicator of people moving to better jobs. As the economy changes from and the demand for some products like coal decreases, workers in that industry will be laid off. This type of unemployment caused by changes in the economy is called structural unemployment. There is little that policy makers can do to address this type of unemployment short of retraining those unemployed workers. A major target of policymakers is cyclical unemployment. As the economy moves into a downturn, workers will be laid off and policymakers will attempt to use monetary and fiscal policy (more about this later) to stimulate the economy and put those laid off workers back to work.
Bottom line:
Two indicators used to measure the state of the labor market are the civilian unemployment rate and the number of new jobs created as measured by the change in nonfarm payroll employment. Three categories of unemployment that require different types of policies are frictional, structural, and cyclical unemployment.
Two reports that provide labor market information are the _____________________________ and the _________________________________________________
Label the following as frictional (F), structural (S), or cyclical (C). _____ Mary has been laid off at the gym. Her boss said that many of her clients are no longer coming. Times are tough everywhere. _____ Jorge loses his job at the newspaper. Folks just aren’t reading print papers anymore. _____ Amy quits her job at one clinic and is waiting to start her job at the new clinic in about 3 weeks.
Go to the Federal Reserve Economic Data. https://fred.stlouisfed.org/
Click on the “search” bar and then click on “unemployment rate”.
Remembering that the shaded periods are recessions, what can you say about the relationship of recessions and unemployment?
Slide the sizer bar (the bar at the bottom of the graph) to the year 2000 so that the unemployment rate from 2000 to the present is displayed. You can see three recessions during the time period from 2000 to the most recent data. What do you notice about the length of the 2008 recession? How do you think that affected students entering the labor force during that period?
What is the most recent unemployment rate?
Now, let’s look at another measure of the strength of the labor market, the number of jobs created or lost each month, the change in nonfarm payroll employment. Return to the “Search” bar on FRED’s home page and type “all employees total nonfarm”. The graph illustrates the number of workers employed (in the thousands) from January 1939 to the present.
What do you notice about April 2020?
Let’s change the graph from the number of people employed to the change in the number of people employed. Click on the red bar titled “Edit Graph”. Click on “units” and then click on “Change, Thousands of Persons”. This graph will show the number of jobs created or lost from month to month.
Click on the sizer bar, hold it down, and slide it to the right, until you are displaying the years 2000 to the present. How many jobs were lost in Nov 2001 __________, March 2009 ________, and April 2020 __________? What does that tell you about the impact of Covid on the economy?
Compared to previous periods, is this a relatively Strong or weak labor market?
For a more thorough explanation of the impact of covid on the labor market, go to: An Unemployment Crisis after the Onset of COVID-19 - San Francisco Fed (frbsf.org)