Unemployment

Demi Corrigan and Kerry Mello

This report examines a composite of employment and

unemployment indicators while giving special consideration
to recent trends which help gauge the overall health of the
labor market

Economics 690
3/28/2011
Mar. 28 Unemployment

Overview:

Unemployment can have huge implications on an economy. The unemployment rate can impact the
fiscal and monetary policies of a country, and even threaten the society’s safety and welfare due to
increased crime and poverty. Over the years this economic factor has increased and decreased many
times, and is now analyzed and discussed to a great extent due to its major correlation to the economy
and its situation. There will be a multitude of indicators and employment reports that are discussed,
which must be concurrently reviewed in order to determine the overall health of the labor market.
These indicators are discussed below in further detail and will be applied to the current status of the
United States economy.

Weekly Jobless Claims:

The weekly jobless claims report is published each Thursday by the U.S. Department of Labor. A highly
volatile report, the weekly jobless claims report indicates the number of initial claims for unemployment
insurance in both seasonally and unadjusted data. To make sense of the rapidly fluctuating weekly
figures, many economists rely on the four-week moving average which serves to smooth out much of
the volatility in the data.

Illustrated in Exhibit 1, the seasonally adjusted weekly jobless claims report for February 2011 reveals a
slowdown in firings and a recovery from harsh winter conditions toward the latter half of the month.
According to the Department of Labor, jobless claims on the first week registered at 385,000, the lowest
level since July 2008 (Department of Labor, 2011; Kowalski, 2011). However, in the second week of
February, jobless claims rose above 400,000, a significant threshold for this indicator considering the
size of the U.S. population. According to many economists, weekly jobless claims below 400,000
indicate that businesses are facing sufficient demand to retain employees and add to payrolls.
Conversely, weekly jobless claims above 400,000 suggest low demand for products and services and
correlate with recessions, such as the recession of 2001-2002 (Lazarro, 2011). However, showing true
volatility, weekly jobless claims were on the decline for the next two consecutive weeks in February
(Department of Labor, 2011).
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Civilian Unemployment Rate:

The civilian unemployment rate, defined as the percentage of the labor force which is jobless, searching,
and capable of working, is the most commonly employed labor statistic. To derive at this statistic, the
U.S. Bureau of Labor Statistics relies upon the Current Population Survey to assess the employment
status of 60,000 American households each month. According to the U.S. Bureau of Labor Statistics, the
unemployment rate in January 2011 declined to 9.0%, the lowest level since April 2009 (Bureau of Labor
Statistics, 2011). While 9.0% remains undesirable, the decline in unemployment from 9.8% in November
2010 to 9.0% in January 2011 represented the largest two-month decline in the unemployment rate
since 1958 (Bureau of Labor Statistics, 2011; Zumbrun, 2011; Reddy and Murray, 2011). Although these
statistics suggest that the economic recovery is gaining traction, the Federal Reserve emphasizes that
companies need to add to existing payrolls and accommodate new entrants into the labor force before
full economic recovery can be deemed. Additionally, the recent drop in unemployment appears to
reflect a contraction in the labor pool as many workers have begun to give up in their search for
employment. Moreover, while the recent drop in unemployment provides optimism for an economic
recovery, one must assess employment trends from previous years to gain awareness on where these
figures are possibly heading. For example, Exhibit 2 graphically depicts spikes and troughs in
unemployment rates from 1940 to the present. As a common finding, oil prices tend to rise before
recessions and give way to higher unemployment as higher energy costs facilitate a cost push inflation
which burdens businesses and hinders firms’ ability to add to payrolls in the context of higher
production costs. Consistent with this finding, Exhibit 2 illustrates spikes in unemployment that
correlate with oil shocks in the 1970s and early 1980s. Therefore, this is an important consideration to
bear in mind in lieu of the recent rise in oil prices following political unrest in Egypt and Libya as well as
rising commodity prices worldwide. Nonetheless, staunch opponents of the Fed’s plan to purchase $600
billion in U.S. Treasury securities refer to the recent drop in unemployment as a reason to forgo such an
aggression monetary expansion. The Fed, however, has squelched the enthusiasm associated with the
recent drop in unemployment, noting that they must witness a “sustained period of job creation” prior
to raising interest rates and proclaiming that the economic recovery has taken a firm hold (Zumbrun,
2011). Additionally, the Fed has indicated that the jobless rate is likely to remain elevated for a while,
thereby justifying its original plan to purchase the Treasury securities.
Mar. 28 Unemployment

Further complicating the interpretation of the sudden drop in unemployment are newer estimates
which revise the size of the population and, hence, the unemployment rate. For example, recent data
from the Labor Department’s updated census data reveals that the population estimate in 2010 was
overestimated at just under 350,000 people. Furthermore, the estimates of employed citizens were
overestimated by nearly 475,000 people (Hilsenrath, 2011). Collectively, these revised estimates
potentially overstate the sudden drop in unemployment as an increasing number of citizens are exiting
the labor force. As such, many economists focus on the labor force participation rate as a stronger
indicator for the labor market as it is less likely to be misinterpreted secondary to deceptive population
estimates. In fact, recent headlines note the decline in the labor force participation rate to 64%, the
lowest level since 1984 (Reddy and Murray, 2011). Additionally, the current labor force participation
rate stands lower than the 66% figure that was posted at the beginning of the recession in December
2007. A low labor force participation rate has negative consequence for the long run growth potential
for an economy as a contracted labor force is producing goods and services for the population.
Additionally, those in the labor force remain burdened to financially support those who have voluntarily
left the labor force (Hilsenrath, 2011). Exhibit 3 illustrates the growth and the decline in the labor force
participation rate from 1980 to the present. As implied from this figure, the labor force participation
rose rapidly during the technology boom of the 1990s before taking a sharp decline.

In addition, three emerging trends in the labor force participation rate have been recently revealed. For
example, most recently it has been discovered that men are exiting the labor force with greater alacrity
than their female counterparts, possible due to less advanced education and outmoded skills for the
modern workforce. Additionally, while those over 55 years of age commonly begin to plan for
retirement, recent data suggests that workers in this demographic are re-entering the workforce at a
faster rate to replenish depleted retirement savings. From an employment perspective, this suggests a
growing number of aging workers with declining skills. Finally, data from disability rolls suggests that
workers with active health problems are applying for disability insurance, thus removing themselves
from the labor force (Reddy and Murray, 2011).

On the regional level, the West continues to register the highest regional unemployment rates at 10.9%
for January 2011 as compared with the Midwest and the Northeast at 8.5 % and 8.4 %, respectively
(Bureau of Labor Statistics, 2011). For January 2011, the South posted unemployment rates lower than
the West but higher than both the Northeast and the Midwest. Out of these four regions only the
Midwest registered a statistically significant month to month decline in unemployment rate. Nationally,
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Nevada and North Dakota continue to post the highest and lowest unemployment rates, at 14.2 % and
3.6 %, respectively as illustrated in Exhibit 4. With much of its economy tied to the gambling industry,
Nevada has suffered from the slump in the economy and changes in consumption patterns as they relate
to non-essentials. In contrast, North Dakota enjoys a diversified economy such that any disruption in
one industry sector can be effectively compensated by another. For example, North Dakota possesses
crude oil, strong, prevailing winds that provide optimal conditions for wind power, and a burgeoning
agricultural sector (Reisner, 2009). The ten states with the highest unemployment rates, illustrated in
Exhibit 5, registered unemployment rates between 9.9 % and 14.2 % for January 2011 (Bureau of Labor
Statistics, 2011). Finally, among major worker groups in the U.S., unemployment rates declined among
adult men, Whites and Hispanics, but remained relatively unchanged among adult women, adolescents,
and African Americans (Trading Economics, 2011).

Unemployment Report:

The ADP Employment Report®, developed and maintained by Macroeconomic Advisors, Inc., collects
payroll data from a sample of approximately 500,000 business clients to produce employment data that
is indicative of national trends. Released on the first Wednesday of each month, the ADP Employment
Report® focuses specifically on payroll growth trends for private nonfarm companies utilizing similar
statistical analytics of the Bureau of Labor Statistics.

The February 2011 Report, published on March 2, 2011, demonstrated strong payroll gains among
private nonfarm companies citing an increase of 217,000 jobs from January 2011 to February 2011,
seasonally adjusted (ADP, 2011). These private payroll gains, illustrated in Exhibit 6, offset some of the
loss in public sector jobs as many states and local municipalities have had to make difficult cuts in
payrolls in efforts to reduce budget deficits (Murray, 2011). Additionally, the February report indicates a
month-over-month private payroll gain that exceeds the average gain of the preceding six months (ADP,
2011).

According to the February Report, private sector payroll gains were observed in the service, goods-
producing, and manufacturing sectors, noting January-February payroll increases of 202,000, 15,000,
and 20,000, respectively (ADP, 2011). Although the goods-producing sector showed a slight decline in
job growth at the end of last quarter, data from more recent months suggests steady progress in job
creation.
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The recent uptick in manufacturing, with five consecutive monthly payroll gains, has provided much
optimism considering a steady shedding of jobs in the past decade. Concentrated predominated in the
Midwest and Kentucky, manufacturing jobs related to auto parts and fabricated metals are gaining
traction as local employers partner with technical schools to ensure that graduates of manufacturing
technician programs are equipped with the optimal skill set for the next generation of manufacturing. In
particular demand are manufacturing jobs related to the biosciences, skilled assembly, and electro-
mechanics (Boyer, 2011). While promising, manufacturers must still contend with the grim reality of an
aging manufacturing labor force coupled with an outmoded image of mindless tending to an assembly
line. Additionally, Americans are showing reluctance in pursuing careers in manufacturing out of fear of
being displaced or outsourced. Nonetheless, modern manufacturing training centers are updating
curricula to emphasize critical thinking skills and multidisciplinary approaches to technical problem
solving (Boyer, 2011).

Mass/Extended Layoffs:

As defined by the U.S. Bureau of Labor Statistics, mass layoffs include 50 or more initial claims for
unemployment insurance from a single employer in any given month (Bureau of Labor Statistics, 2011).
The Bureau of Labor Statistics conducts the Mass Layoff Statistic (MLS) program to capture this data
which is reported monthly. Also reported in the MLS program are extended mass layoffs which describes
private nonfarm mass layoff events of at lasting at least 31 days duration during a 5-week period. This
report is published quarterly.

According to the Mass Layoffs summary for January 2011, 1,534 mass layoff events involving nearly
150,000 workers, seasonally adjusted, were undertaken by private employers (Bureau of Labor
Statistics, 2011). This represented an increase in the number of mass events and the number of workers
affected. Despite this month-to-month increase, total mass layoff events have been in a steady decline
since 2009 as illustrated in Exhibit 7. Peaking at approximately 3,000 events per month in the first
quarter of 2009, total mass layoff events have averaged approximately 1,500 per month since first
quarter 2010. Additionally, steady declines in mass layoff events have been observed in the
manufacturing sector as well. From an industry standpoint, temporary help services witnessed the
largest number of mass layoff initial claims in January 2011 (Bureau of Labor Statistics, 2011). However,
this may be perceived as a positive finding if the layoff events were related to a declining need for
temporary staffing agencies as workers were able to find more lucrative or permanent work.
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For the fourth quarter of 2010, employers took nearly 2,000 extended mass layoff events affecting just
under 300,000 workers. Of these extended mass layoff events, manufacturing accounted for 20 % of the
events while permanent worksite closures accounted for 6 % of private nonfarm extended mass layoff
events (Bureau of Labor Statistics, 2011). In terms of industry distribution, construction and
manufacturing accounted for nearly half of all extended mass layoff events for fourth quarter 2010,
registering at 30 % and 20 % of events, respectively.

Employment Situation:

A monthly release is issued by the Bureau of Labor Statistics regarding the current Employment
Situation. The material is released on the first Friday of every month for the preceding month. An
annual release is issued every June with the previous year’s totals. The Employment Situation release
provides an extensive amount of data regarding the all different aspects of the job market. The release
is based off of two surveys that are issued – the household survey and the establishment survey.

The household survey is compromised of the unemployment rate, major working groups, employment –
population ratio, labor force participation rate, and discouraged workers. The establishment survey
deals with nonfarm payroll, manufacturing, temporary help, as well as, the average workweek and
hourly earnings for production and supervisory positions.

The employment situation release is the most closely watched economic statistic. This is because it is
very timely (current), accurate, and a really important indicator of the economic activity. This report can
also show indicators of production before the quarterly GDP numbers are available. The main areas to
focus on from the report are the total change in payroll, any changes in the hourly average earning and
hours worked per week, and a high unemployment overall rate or any drastic changes to the rate itself.
These figures can be a good proxy for current GDP growth.

From this release you can see the changes in employment for each sector, therefore, showing where
there is growth and for who. Positive changes in numbers will signal growth in that area, while negative
changes usually indicate a contraction or recession. In the Employment Situation for February 2011, the
most recent release, the unemployment rate was 8.9% - compared to 9% in January 2011 in exhibit 8.
This is not a huge decrease, but from only one month to the next – it is significant. The large changes in
the month of February were in nonfarm payroll, which had an increase of 192,000 jobs, and in average
hourly earnings, which increased $.01.
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If you then compare the 2011 Employment Situation to that of past years, it looks better in some areas
and worse in others – see exhibit 9. The unemployment rate is higher now than it was a few years ago,
however, the jobs are on the rise and the average hourly wage is higher. The economy is still trying to
recover from the downturn that it recently took. If you look at the numbers from early months of 2010
and 2009, you can see that there were huge declines in employment for those periods. The
employment rate jumped almost 2% in one year, and has since only dropped less than 1% (BLS, 2011).
The wages have had a steady increase due to inflation and rising cost of living.

Non-Farm Payroll:

Non-farm payroll, which has been mentioned earlier in this report and is included in the Employment
Situation, is a statistic that is recorded and reported by the Bureau of Labor Statistics on the first Friday
of every month (for previous month’s numbers). Roughly 160,000 businesses and agencies are
surveyed, which represents around 400,000 individual work sites; in order to determine the payroll,
workweek, and wage figures for the US. Non-farm payroll represents the total number of US paid
workers of any business, except – government employees, private household employees, non-profit
organization employees, and farm employees. All construction, manufacturing, health care and goods
producing jobs fall under this category. The payroll hit an all-time low in 1945 of -1,966,000 and a high
of 1,114,000 in 1983 (Investopedia & Tradingeconomics, 2011)

Over the past year, non-farm payroll has increased around 93,000 per month. But in February 2011,
there was increase of 192,000 – with a steady increase across all groups, Manufacturing, Construction,
Health Care, etc (see exhibit 8). This figure could be a signal strong economic growth; but it will be hard
road to full recovery. The construction areas had recently took huge hits prior to February due to
horrible weather and resulting issues. As with this Sector, some others are very season-dependent and
will fluctuate with temperate and the climate situation. Recessions, like the one we just recently
experienced, can have a huge impact on these numbers also. There were changes of about -600,000
and -800,000 in the labor force in early 2009 (BLS, 2011).

This statistic is important because it accounts for approximately 80% of all the workers who produce the
gross domestic product (GDP) for the United States. And as the GDP is a large indicator of how the
economy is going to be doing; this number can strongly affect the US dollar, as well as, the stock and
bond markets also. As the figure increases, this means that businesses are hiring more employees, who
will now have more money to spend on goods and services – therefore signaling growth. As the payroll
Mar. 28 Unemployment

number decreases, less people are working and have less money to spend and stimulate the economy.
When the non-farm payroll as a percentage of the overall workforce becomes too low, most expect
inflation to follow. The payroll figure can also affect if the government thinks that it is necessary to have
a tighter monetary policy or have quantitative easing. Overall the number and implications can be used
to help determine the current state of the economy and the future levels of economic activity.

Employment Cost Index:

The employment cost index (ECI) measures the relative changes in wages, benefits, and bonuses for
groups of occupations and industries. The ECI is an index-based indicator; the base period is December
2005, which has a weight of 100 (BLS, 2011). The rates of change are calculated compared to the
previous quarter and on a year over year basis also. It is released quarterly by the Bureau of Labor
Statistics on the last business day of January, April, July and October for the prior quarter. The data is
compiled through separate surveys of about 4,500 non-farm businesses and 1,000 state and
government offices. The result indicates the total cost of employing a worker or the total compensation
costs.

The ECI incorporates all the different employee costs, not just wages and salaries. All the various
insurances, bonuses, and pensions are all included and broken out separately. This can allow for some
volatility in the figure during times when periodic bonuses or commissions are paid. As you can see in
exhibit 10, the total compensations costs were up .4% in fourth quarter of 2010. During this particular
quarter, both the wages and salaries and the benefits both has increased .4%; however, sometimes they
change at a different rate. If look at the first quarter of 2010, you will see that the wages and salaries
increased by .4%; while the benefits increased by 1.1%. This resulted in the compensation costs
increasing by a weighted .6%. The wages and salaries create 70% of the compensation costs, while the
benefits consist of the other 30%.

The ECI is used as an indicator of inflation. As wages and salaries increase, the costs of running
businesses rise. This additional amount or cost is then passed down to the consumers through higher
prices or inflation. The ECI is used by the Federal Reserve also when setting the fiscal and monetary
policies. They prefer to use this report or release by the BLS versus the Employment Situation Release
because the Employment Situation report only includes wage information and the ECI has the option to
use a basket of occupations as opposed to a single group, which eliminates unnecessary shifting. As this
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indicator is a signal of inflation, it can affect stock and bond prices; any larger-than-expected increases in
the index will likely lead to downward pressure being placed on the security prices.

Recent upticks in the index are in majority related to increasing spending on benefits (Cornell – ICS,
2011). There have been a growing number of retirement benefits and large increases in health
insurance costs; although, salaries and wages have increase slightly also. Since the recession, the ECI
has risen from 111 in the fourth quarter of 2009 to 112.9 in the fourth quarter of 2010; which is an
increase of about 13 index points in 4 years (see exhibit 11).

Unit Labor Cost and Productivity:

The Bureau of Labor Statistics defines unit labor cost as the ratio of hourly compensation to labor
productivity. It is an index with a base year of 2005. Increases in hourly compensation will increase unit
labor costs and increases in productivity will reduce them. The BLS produces a quarterly report called
Productivity and Costs which discuss the current state of both of these aspects in depth. As the
compensation portion of the ULC has already been discussed previously and is known to be a
culmination of wages, contributions, benefits, and taxes – the productivity portion will now be
discussed.

Productivity relates output to the labor hours used in the production of that output (BLS, 2011); labor
productivity is calculated by dividing an index of real output by an index of hours involved in its
production of all persons, including employees, proprietors, and unpaid family workers. There are two
BLS programs that measure productivity; one for the major sectors, like non-farm, manufacturing, etc;
and one for the various industries. Although the productivity in the United States is one of the highest
when comparing it to other countries as seen in exhibit 12; the growth has been declining since early
2009. At one point in the second quarter of 2010, it even decreased.

As the productivity is increasing at a higher rate than compensation, the unit labor costs have declined
for the United States. The productivity has increase greatly from 2009 to 2010, with annual average
changes of 3.7 in 3.9 respectively in non-farm business and 2.4 and 6.7 in manufacturing. The unit labor
costs have, in turn, decreased approximately 1.5 in the non-farm sector and 4.4 in the manufacturing
sector for 2010 (BLS, 2011) (see exhibit 13). This can be good for the companies and the economy, but
it can be bad for the employee. An increasing productivity with a decreasing unit labor cost can lead to
the employees being underpaid or overworked.
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Current Status Summary and Moving Forward:

The unemployment rate is in a decline and is below 9%, according to the BLS, for the first time in two
years; but it is moving at a slow pace. The labor force is growing in the service and professional sectors;
while construction recently was not doing well due to the weather and higher fuel costs, and the state
and local governments have made massive layoffs to try and reduce the budget deficit. The fact that a
lot of older people have to continue working is raising the percentage of workers over 55; and the
Hispanic percentage of labor workers is on the rise also.

Employers seem to be rebounding from the harsh recent conditions, but the participation rate is low.
This can signify sluggish or stagnant long-term growth and might even be an indication of a deeper
problem in the labor market. If for example, according to the Wall Street Journal article Jobless Rate
Falls Further, the labor force participation today were at the same level as before the recession, the
jobless rate would have been 11.5% in February rather than 8.9%.

Another point of view states that the actual unemployment rate should be somewhere around 25 –
30%, which is actually a depression level unemployment rate. This is occurring due to the various
classifications (U1 – U6) or boxing of unemployment: the official unemployment box (U3), the true full
unemployment box, and the private sector job loss box. The U3 rate is what the government reports
but it is not complete. It does not include people that have been looking for a long time and cannot find
a job, which would be an extra 9%; and it allows an increase in government spending to hide a private
sector job loss of 17% (total is U6 classification). According to this, there will be no double dip as we are
already down to a depression level.

Depending on which unemployment figure you accept, the US can be in a different situation. However,
with each situation, there still needs to be a continued addition of employees to the labor market in
order to stimulate the economy and recover from this recession (or depression). In order for there to be
a strong recovery, employers would need to be adding around 300,000 jobs every month versus the
192,000 that was just raved about for February (Amerman, 2011). In order to increase hiring, there
needs to be an increase in demand for products and services. With all of the turmoil and disasters that
are occurring across the globe right now, the US should try and capitalize on our stability and ability to
produce and export resources, products, and services. As the unemployment rate drops, GDP can grow
and high inflation can be avoided.
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References:

ADP Employment Report (2011). February 2011 Report, published March 2, 2011

Boyer, M. (2011). Manufacturing Jobs on the Rise, accessed on February 25, 2011 at
http://communitypress.cincinnati.com/article/AB/20110220/BIZ01/302200016/Manufacturing-jobs-rise

Bureau of Labor Statistics (2011). Extended Mass Layoffs- Fourth Quarter 2010: Annual Totals 2010,
Released on February 11, 2011

Bureau of Labor Statistics (2011). Labor Force Statistics from the Current Population Survey. Generated
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Bureau of Labor Statistics (2011). Mass Layoffs-January 2011. Released February 23, 2011.

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2011, released on March 10, 2011.

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Hilsenrath, J. (2011). Messy New Estimates Complicate Explanation for Unemployment Rate Drop.
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Kowalski, A. (2011). U.S. Initial Jobless Claims Fall to 383,000, Lowest Level Since July 2008. February 10,
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Murray, S. (2011). Local Governments Keep on Paring Payrolls, The Wall Street Journal, March 5-6, 2011.
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Reddy, S. and Murray, S (2011). Jobless Rate Falls Further. The Wall Street Journal, March 5-6, 2011.

Reisner, R. (2009). What’s North Dakota Doing Right? August 30, 2009, accessed on March 10, 2011 at
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Trading Economics (2011). U.S. Unemployment Rate Drops to 9 % in January. Published February 4, 2011

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Mar. 28 Unemployment

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show-1.jpg
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Exhibits:

Exhibit 1: Weekly Jobless Claims for February 2011

Exhibit 2: Civilian Unemployment Rate, 1940-2011

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Exhibit 3: Labor Force Participation Rate: 1980-2011

Exhibit 4: National Unemployment, 2010

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Exhibit 5: Unemployment Rate by State, January 2011

Exhibit 6: Private Nonfarm Payroll Gains, January-February 2011

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Exhibit 7: Total Mass Layoff Events, 2009-2011

Exhibit 8: Employment Situation for January and February 2011

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Exhibit 9: Employment Situation January 2009 – 2011

Exhibit 10: Composition of Compensation Costs FY 2010

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Exhibit 11: Employment Cost Index 2001 - 2011

Exhibit 12: Productivity by Country 2009

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Exhibit 13: Unit Labor Costs 2008 - 2010