Why is the unemployment rate used as such a distinctive indicator for the state of the economy and how does the U.S. compare to other countries?
Shelly Matushevski
Economics Minor at the University of Akron
September 9, 2009
Each month the BLS[1], Bureau of Labor Statistics, reports the unemployment rate, and whether there is an increase or decrease, it seems that it is interpreted to either indicate that something good or bad is happening with the economy. This paper will begin to discuss to what extent we should rely on the unemployment rate as an indicator for the state of the economy and how the United States compares to other countries.
Before we begin to understand the role of the unemployment rate in the United States economy, it is first important to understand how the data for the unemployment rate is collected and calculated. As reported by Gary Clayton in A Guide to Everyday Economic Statistics,
“Unemployment data are collected monthly by the Bureau of the Census for the Bureau of Labor Statistics (BLS) using a survey covering 60,000 households in approximately 2,000 counties and independent cities, with coverage in all 50 states and the District of Columbia. The survey is called the Current Population Survey (CPS), and it is the source of most labor market data, including earnings differentials among worker groups, labor force participation rates, and demographic characteristics of workers.”
After determining the number of employed, unemployed, and total number of people in the civilian labor force the following formula is used:
Unemployment Rate= (number unemployed)/ (civilian labor force)[2] (Clayton & Giesbrecht, 2004)While this formula seems to account for mostly all people in the United States there is still a group not included. This group is known as “discouraged workers” and is made up of people who have stopped looking for a job because they believe there were no jobs available. According to Clayton, there were approximately 478,000 discouraged workers in June 2003. Although discouraged workers are not counted as part of the labor force, their numbers seem to increase when there is a recession. According to the BLS, “the number of discouraged workers rose to 717,000 in the first quarter of 2009, a 70 percent increase from the first quarter of 2008.” As demonstrated in Figure 1, this huge increase in the number of discouraged workers seems to coincide with the country’s economic downturn, showed by the gray bars signifying a recession. Also during this time, the unemployment rate steadily rose throughout the recession. The graph also records the last two recessions in the 1990s and early 2000s. By graphing the unemployment rate with the recession bars we see that there seems to be a connection between the unemployment rate and the business cycle[3]. The unemployment rate has consistently risen during recessions and then bounced back and dropped back down once the country moves onto another stage of the business cycle.
After further research, there seems to be evidence to support the use of the unemployment rate as an indicator for where the economy is in the business cycle. As supported in journal articles by both Monika Merz of the Department of Economics of Texas and Jan C. van Ours with the Center for Economic Research, the unemployment rate follows closely with the trends of the business cycle. As specifically stated by Merz, “Unemployment flows simultaneously occur over the U.S. business cycle, and the size of the flows is positively linked to the unemployment rate.” This conclusion was stated by Merz and drawn from the studies of other economists. The unemployment rate seems to coincide very closely with the U.S. business cycle as shown in Figure 1, and is also proved through the research of others. From the evidence, the unemployment rate can be used as a fairly accurate predictor for the upturns and downturns of the economy.
Since we now know that the unemployment rate is actually a respectable predictor for the economy, it is logical to compare the U.S. to other countries. According to John Schmitt, Hye Jin Rho, and Shawn Fremstad from the Center for Economic and Policy Research, the low unemployment rates of the U.S. in the early 1990s caused the U.S. to become a model for other countries and their economies. Unfortunately, the recent economic downturn has completely voided all ideas of modeling an economy after the economy of the U.S. During these earlier years the U.S. has an unemployment rate as low as 4.0 percent. Presently the United States has an unemployment rate within the four highest countries in the Organization for Economic Cooperation and Development at 9.7 percent (U.S. Bureau of Labor Statistics). Also according to this same article, the U.S. is one of the countries that have increased its unemployment rate the most since 2007(Schmitt, 2009). While the United States is not doing so well with the unemployment rate still increasing, there are some countries with a higher rate, although, this does not necessarily mean that that country is suffering more economically. And while the United States has not seen an unemployment rate this high in quite a few years, according to Figure 1 it seems that the unemployment rate is just doing its job as an indicator and following the business cycle and the trends of the economy.
Works Cited
Clayton, G. E., & Giesbrecht, M. G. (2004). A Guide to Everyday Economic Statistics. New York: McGraw
Hill Irwin. (Schmitt, Rho, & Fremstad, 2009)
Merz, M. (1999). Time Series Evidence of Unemployment Flows: The Sample Period Matters. Journal of
Business and Economic Statistics , 324-334.
Ours, J. C. (2001). Business Cyles and Compsitional Variation in U.S. Unemployment. Journal of Business
and Economic Statistics , 436-448.
Schmitt, J., Rho, H. J., & Fremstad, S. (2009, May). Center for Economic and Policy Research. Retrieved
September 8, 2009, from
U.S. Bureau of Labor Statistics. (n.d.). Retrieved September 8, 2009 , from United Stated Department of
Labor:
[1] The Bureau of Labor Statistics is an independent national statistical agency that collects and analyzes statistical data and distributes this information to the public, the U.S. Congress, and other organizations.
[2] Employed: If a person did any work at all as a paid employee, worked in their own business or profession for pay, or worked without pay at least 15 hours in a family business.
Unemployed: Jobless but also available and looking for work
Civilian Labor Force: All civilians 16 years or older who are not confined to an institution (Clayton & Giesbrecht, 2004).
[3] The business cycle is periodic but irregular up and down movements of the economy usually classified into: recession, trough, expansion, and peak.