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 => Y/Y => P/P => DBonds => iBonds

Stocks: If jobs and Y < YPot => Y/Y => profits => PStocks

Dollar: jobs => Y/Y => iBonds => dollar

Total Nonfarm Employment(Thousands, SA)

129000

130000

131000

132000

133000

134000

135000

136000

137000

138000

139000

140000

04 05 06 07 08 09 10 11 12 13

129000

130000

131000

132000

133000

134000

135000

136000

137000

138000

139000

140000

Recession

Employment

Positive First DerivativeUpward sloping

E/T

Negative First DerivativeDownward sloping

-E/T

Inflexion Point

Negative Second Derivative

Decreasing at an increasing rate

Positive Second Derivative

Decreasing at a decreasing rate

Inflexion Point

Negative Second Derivative

Increasing at a decreasing rate

Positive Second Derivative

Increasing at an increasing rate

US Payroll Employment Rate of Change Monthly Changes SA

-900

-800

-700

-600

-500

-400

-300

-200

-100

0

100

200

300

400

500

600

04 05 06 07 08 09 10 11 12 13

Tho

usan

ds

-900

-800

-700

-600

-500

-400

-300

-200

-100

0

100

200

300

400

500

600

Recession

Payroll

7-Month Centered Moving Average

A Positive 2nd derivative is a necessary but not sufficient condition for a self-sustaining recoveryA positive 1st derivative is a sufficient condition for a self-sustaining recovery

23

Unemployment Rate

0

1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

808182 83848586 87888990 91929394 95969798 99000102 03040506 07080910 111213

(Per

cen

t)

0

1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

Recession

Unemployment

Underemployment (U-6)

Full Employment (NAIRU)

Source: Department of Labor.

UnemployedDiscouragedInvoluntarily working part-timeMarginally attached (want jobs but haven’t searched in a month)

U.S. Employment and Labor Force

Household Survey

130

135

140

145

150

155

160

01 02 03 04 05 06 07 08 09 10 11 12 13

(Mil

lio

ns)

130

135

140

145

150

155

160

Recession Labor Force EmploymentSource: Department of Labor.

Qtrly U.R.

Okun’s LawNegative correlation between Y/Y and unemployment rate

QtrlyY/Y

U.R. = a + b [Y/Y]Last 60 years relationship U.R. = 0.23 – 0.07 [Y/Y]

0.23

3.3

Slope = - 0.07 / 1

-a / b = -0.23 / -0.07 = 3.3Growth associated with

stable unemployment

2.3Slope = - 0.04 / 1

0.09

in U.R. associated

with Y/Y = 0Estimated regression equation

Last 13 years U.R. = 0.09 – 0.04 [Y/Y]

Unstable Relationship ( coefficients) due to:1. Slower labor force growth2. Jobless expansions3. Slower to fire, slower to hire4. manufacturing, service sectors5. 1984 to present, the “Great Moderation”

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%

Chapter 8: Unemployment and Inflation

The Household Survey The unemployment rate measures the percentage of the labor

force that is unemployed:

The labor force participation rate measures the percentage of the working-age population that is in the labor force:

rateent Unemploym 100x ForceLabor

unemployed ofNumber

rateion participat forceLabor 100 x population age-Working

forceLabor

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 explicitlyPaasche index

Consumer Price Index (CPI)Explicit index because it is calculated directlyBased on fixed market basket of 364 consumer goodsLaspeyres indexSocial security payments and federal income tax brackets adjust automatically to changes in

the CPIBecause of substitution bias, the CPI overstates inflation by 1 percentage points per yearSubstitution bias: changing supply conditions => change relative prices => HHs purchase

cheaper good

Unanticipated and Anticipated InflationThere 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 InflationHigh 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.