Transcript Unemployment Rate

Employment Situation
( Measures Labor Market Conditions & State of Economy)
Web address: http://stats.bls.gov/news.release/empsit.toc.htm
Payroll numbers revised back 2 months and benchmarked each June. Rare benchmark changes to unemployment rate but is revised.
The 2 reports are rich in detail about job market and household earnings to forecast future economic activity.
 jobs =>  income =>  consumption (70% of GDP) =>  economic growth
Sometimes reports are in conflict as they probe the labor market from different perspectives but in the long run the 2 numbers move in tandem.
Household Survey: unemployment rate – percentage of civilian labor force that is unemployed.
Lagging indicator because it responds slowly to changes in the economy. Joblessness can continue to rise 2 years after recession ends. Typically firms are slow to hire & slow to fire.
A rise in the unemployment rate is a leading economic indicator of a downturn of economic activity. Layoffs now occur months before onset of recession.
60,000 homes surveyed by phone and mail (includes farm, non-farm, self-employed, domestic help)
Survey is done in the week containing the 12th day of the month
Determines civilian labor force (economic pool of labor)
Unemployed include those who are actively seeking work, not discouraged workers.
Caveat: the integrity or accuracy of the data is in question.
Change in household employment is a crucial number to determine economic turning points because it includes the self-employed and the people they hire.
The labor force increases by 150,000 each month due to population growth. So the economy needs to grow annually between 3-4% to create sufficient jobs to keep the unemployment
rate constant.
Establishment Survey: (a.k.a payroll survey) – net number of new jobs gained or lost. Most important number released.
Net out change in government jobs to determine conditions in private business sector.
Manufacturing hours of work > 41.5 implies economy growing. Less than 41 implies economy is struggling.
Overtime hours are an excellent indicator of future employment and GDP trends.
Overtime < 4 hours => layoffs. Overtime > 4.5 => new hiring.
Duration of unemployment is a good barometer of economic activity. If average length of time is greater than 19 weeks indicates a weak economy.
Labor underutilization includes discouraged workers (U-5) and workers who would like full-time work but have accepted part-time work (U-6).
Diffusion Indexes measure the percent of industries that have increased their payrolls. Useful to assess business confidence and future employment trends. Index < 50 indicates most
firms cut employees.
Establishment survey is a better employment measure than household survey
400,000 business and government agencies surveyed by mail and telephone.
Same mid-month schedule as household survey. 60-70% of responses make it in time for release.
Large revisions due to small firms responding late with replies. This forms the basis for subsequent revisions in each of the next 2 months. But small firms are usually the first to hire
and fire workers.
Excludes farm workers, the self employed, and domestic help.
Makes no distinction between full and part-time work. (if a worker recently gets 2 part time jobs, HH survey counts it as 1 new employed person, the establishment survey counts it as 2
new jobs)
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Market Analysis:
Bonds: If  jobs and Y > YPot =>  DY/Y =>  DP/P =>  DBonds =>  iBonds
Stocks: If  jobs and Y < YPot =>  DY/Y =>  profits =>  PStocks
Dollar:  jobs =>  DY/Y =>  iBonds =>  dollar
Recession
Total Nonfarm Employment
(Thousands, SA)
140000
Positive First Derivative
Upward sloping
+DE/DT
139000
Employment
140000
Negative First Derivative
Downward sloping
-DE/DT
139000
138000
138000
137000
Positive Second
Derivative
Increasing at an
increasing rate
136000
135000
137000
Negative Second
Derivative
Increasing at a
decreasing rate
134000
136000
135000
Negative Second
Derivative
Decreasing at an
increasing rate
133000
132000
134000
Positive Second
Derivative
Decreasing at a
decreasing rate
133000
132000
131000
131000
130000
130000
Inflexion Point
Inflexion Point
129000
129000
04
05
06
07
08
09
10
11
12
US Payroll Employment Rate of Change
Monthly Changes SA
Thousands
600
A Positive 2nd derivative is a necessary but not sufficient condition for a self-sustaining recovery
A positive 1st derivative is a sufficient condition for a self-sustaining recovery
600
500
500
400
400
300
200
300
200
100
100
0
-100 04
0
05
06
07
08
09
10
11
12 -100
-200
-200
-300
-300
-400
-400
-500
-600
-500
-600
-700
-800
-900
Recession
Payroll
7-Month Centered Moving Average
-700
-800
-900
Unemployment Rate
18
18
17
16
(Percent)
15
17
Unemployed
Involuntarily working part-time
Marginally attached (want jobs but haven’t searched in a month)
16
15
14
14
13
13
12
12
11
11
10
10
9
9
8
8
7
7
6
6
5
5
4
3
2
1
Recession
Unemployment
4
Underemployment (U-6)
Full Employment (NAIRU)
2
0
3
1
0
80 81 82 83 84 85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12
Source: Department of Labor.
23
(Millions)
U.S.
Employment and Labor Force
Household Survey
160
160
155
155
150
150
145
145
140
140
135
135
130
130
01
02
Source: Department of Labor.
03
04
05
06
Recession
07
08
09
Labor Force
10
11
12
13
Employment
Okun’s Law
Qtrly
D U.R.
0.23
Negative correlation between DY/Y and D unemployment rate
D U.R. = a + b [DY/Y]
Last 60 years relationship
D U.R. = 0.23 – 0.07 [DY/Y]
Slope = - 0.07 / 1
0.09
3.3
 in U.R.
associated
with DY/Y = 0
Qtrly
DY/Y
Slope = - 0.04 / 1
2.3
Estimated regression equation
Last 13 years
D U.R. = 0.09 – 0.04 [DY/Y]
-a / b = -0.23 / -0.07 = 3.3
Growth associated with
stable unemployment
Unstable Relationship (D coefficients) due to:
1. Slower labor force growth
2. Jobless expansions
3. Slower to fire, slower to hire
4.  manufacturing,  service sectors
5. 1984 to present, the “Great Moderation”
Chapter 8: Unemployment and Inflation
Unemployment:
A problem of matching workers to jobs
The level and dynamics of unemployment is related to the rate at which people
find and lose jobs
Economic forces influence the rates of job findings and job separation
Unemployment Rate – Fraction of labor force that has no job
Median unemployment rate = 5.4% (1890-1996)
Mean unemployment rate = 6.4%
The Household Survey
 The unemployment rate measures the percentage of the labor
force that is unemployed:
Number of unemployed
x 100  Unemploym ent rate
Labor Force

The labor force participation rate measures the percentage of the
working-age population that is in the labor force:
Labor force
x 100  Labor force participat ion rate
Working - age population
Measures of Price Level & Inflation
Implicit GDP price deflator = Nominal GDP x 100
Real GDP
Real GDP =
Nominal GDP
x 100
Implicit GDP price deflator
By dividing nominal GDP by the implicit GDP price deflator we effectively deflate
nominal GDP to determine real GDP
“Implicit” deflator because it is not calculated explicitly
Paasche index
Consumer Price Index (CPI)
Explicit index because it is calculated directly
Based on fixed market basket of 364 consumer goods
Laspeyres index
Social security payments and federal income tax brackets adjust automatically to changes in
the CPI
Because of substitution bias, the CPI overstates inflation by 1 percentage points per year
Substitution bias: changing supply conditions => change relative prices => HHs purchase
cheaper good
Measuring Inflation
BASE YEAR (1999)
PRODUCT
2006
QUANTITY PRICE EXPENDITURES
PRICE
2007
EXPENDITURES PRICE EXPENDITURES
Eye
examinations
1
$50.00
$50.00
$100.00
$100.00
$85.00
$85.00
Pizzas
20
10.00
200.00
15.00
300.00
14.00
280.00
Books
20
25.00
500.00
25.00
500.00
27.50
550.00
Total
750.00
FORMULA
Expenditur es in the current year
CPI = Expenditur es in the base year  100
900.00
APPLIED TO 2006
 $900 

  100  120
 $750 
915.00
APPLIED TO 2007
 $915 

  100  122
 $750 
Unanticipated and Anticipated Inflation
There are two different kinds of inflation:
Unanticipated inflation:
An increase in the price level that comes as a surprise, at least for most
individuals.
Anticipated inflation:
A widely expected change in the price level.
Effects of Inflation
High and variable rates of inflation are harmful for a number of reasons:
Because unanticipated inflation alters the outcomes of long-term projects
like the purchase of a machine or operation of a business, it will both
increase the risks and retard the level of such productive activities.
Inflation distorts the information delivered by prices.
People will respond to high and variable rates of inflation by spending less
time producing and more time protecting their wealth and income from the
uncertainty created by inflation.
What Causes Inflation?
Nearly all economists believe that rapid expansion in the money supply is the
primary cause of inflation.