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Posts from the ‘Unemployment’ Category

Teaching High School Students About Unemployment

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How would you use a sampling distribution to measure unemployment? Students at Lee Middle and High School, in Lee, Massachusetts, recently learned this lesson with some help from the American Institute for Economic Research.

Teachers who participated in AIER’s Teach-the-Teachers Initiative are field testing their lesson ideas. On January 28, we visited Lee to observe the AP Statistics class taught by Thomas McCormack. Prior to our visit, Mr. McCormack assigned each of his 20 students a labor force status (for instance, a retiree, a full-time student, a laid-off person). In addition, each student was given a randomly generated list of 10 of their classmates. This was an attempt to replicate the Bureau of Labor Statistics’ monthly survey when they use random digit dialing. Thus, each student had a sample of 10 students and was told to record the labor force status of each student in their sample. Then each student calculated the unemployment rate for their sample by dividing the number of unemployed by the number of people in the labor force, which is the sum of employed and unemployed. So each student obtained one number to represent the unemployment rate for their sample.

During the class period each student came up to the white board and put their unemployment rate statistic on a number line. As a whole, the class created a dot plot of 20 unemployment rates. Of course, each of the 20 unemployment rates was different, and represented a distribution of unemployment rates in 20 possible samples. This is exactly the definition of the sampling distribution! It was visual, it was understandable to the students, and it was cool!

Mr. McCormack then posed the question: “We have only one true number of the unemployment rate in this population, but we have all these dots here…. Why do you think that is?” The students discussed the concepts of a “range,” a “mean,” and a “standard deviation.” The teacher went on to describe the normal distribution and its properties.

IMG_1021 Based on the sampling distribution of the unemployment rate depicted on the board (in this class we had rates that were as low as 17% and as high as 57%), students predicted the unemployment rate for the whole population and then compared this prediction with the actual unemployment rate defined by the teacher for this activity. This helped them to see that, even though there was one true unemployment rate for the population (33%), individual samples can vary quite a bit. The class discussed the reasons for the “errors” and proposed ways to minimize them, such as using a larger sample, for example.

This creative lesson required students to actively engage with the concepts of an unemployment rate and a sampling distribution. In addition to employing the inquiry-based method, it allowed the infusion of economic concepts into a statistics class, promoting an interdisciplinary approach to teaching and learning. All of these things are important for building college- and career-readiness skills among high school students. We are happy that our program helped Mr. McCormack to create such a stimulating lesson.

We are offering three workshops for teachers during the Summer 2016. Visit our Web site to learn more and to register for the program: https://www.aier.org/teach-teachers.

Pictures: First picture shows the role-playing cards being used by students to guess the actual unemployment rate after they saw the sampling distribution on the board, which is shown on the second picture.

 

Marketplace of Ideas

 

Money Talks Illustration by Oliver Munday, The New Yorker

GDP grew more than expected last quarter, jobless claims remain low, and one survey-based index says manufacturing activity hit a three-year high in July. Here are a few other stories from the week’s economic news:

  • The verdict on the July jobs report is that it was a “mild disappointment.” Non-farm payroll employment rose by 209,000 last month, below gains of 298,000 in June and 229,000 in May. Since the start of the year, the labor force has grown by an average of 126,000 people per month. Over the same period, job gains have averaged 230,000 per month. If sustained, that difference is enough to keep the unemployment rate falling by more than 0.1 point per month. The unemployment rate did nudge up a bit in July, to 6.2 percent from 6.1 percent, but that follows an outsized 0.6-point drop between March to June. While unemployment is down from a peak of 10.0 percent during the recession, Justin Wolfers, writing for the Upshot, says it is still way too high. Wolfers observes that if you were to line up all the unemployed people in the country, they would stretch from New York to San Francisco. That is a striking visual, but what does it mean for the economy? Following the recession, unemployment peaked at 15 million people. That number is down to 9.7 million now, but it is still higher than the low of 6.8 million prior to the recession. AIER’s Business-Cycle Conditions analysis suggests the economy will strengthen in the second half of the year, which should keep the employment picture improving.

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People and Businesses in Recessions

The stubbornly high unemployment following the last recession, coupled with corporate profits reaching record levels, can create a picture in the minds of people that businesses are having it easy at the expense of workers. This picture may be misleading. Recessions are also tough on businesses and business owners, but the data that reflect this are not nearly as prominent as the unemployment statistics.

The way we measure unemployment is fundamentally different from the way we measure businesses. Businesses can appear and disappear in response to economic conditions, but people tend to stick around no matter what.

There is no equivalent of a long-term unemployed worker in data on businesses. People can remain unemployed for months or years, and we will have data about these numbers. Businesses usually cannot remain without customer orders for many months and survive. Such businesses close their doors and disappear from data – data about sales, data about business profits, and other data.

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Good but not Great: Our View of the March Employment Report

The March Employment Situation showed improvement in hiring and hours worked, reflecting a rebound from weather-distorted data in January and February. There were also upward revisions to the prior month’s jobs numbers, adding an additional 37,000 to payrolls. For the private sector, payrolls rose 192,000 in March, bringing the three-month average to 182,000, just slightly below the 12-month average of 189,000.

On the negative side, hourly wages fell 0.1 percent for the month, putting the year-over-year gains at just 2.2 percent. Faster wage gains are the key to improving consumer confidence and accelerating consumer spending. The aggregate payrolls index, which combines employment, hours, and wages, rose 1.0 percent in March and is up 4.0 percent for the quarter – in line with growth over the past few years. The rise in the payrolls index points to continued moderate growth in personal income, which in turn should support moderate gains in consumer spending.

In total, the report suggests that the first quarter ended with improving, though not great, momentum, and this positive momentum will likely carryover into second quarter GDP growth. These results are consistent with the results of AIER’s on-going business indicators analysis.

However, many of the gauges on the Yellen dashboard – particularly broader measures of unemployment and the number of marginally attached, discouraged, and involuntary part-time employees – remain weak. With the outlook for growth still considered to be below trend, and with inflation measures running below the Fed’s target, the Fed is unlikely to change the course of monetary policy based on this report.

[Photo: ECI.com]

What’s on Janet Yellen’s Dashboard?

The Federal Reserve’s Federal Open Market Committee (FOMC) this week changed its “forward guidance” on monetary policy, dropping its 6.5 percent unemployment rate “threshold” for considering an increase in the federal funds target rate. Previously, the Fed had said that it would keep its key interest rate target near zero “at least as long as” the unemployment rate remained above 6.5 percent, then “well past the time” it declined below 6.5 percent. The unemployment rate is currently 6.7 percent.

Explaining the move, Chair Janet Yellen said that as the economy comes closer to achieving full employment, the FOMC will have a more finely balanced decision about when and by how much to raise the target for short-term interest rates. So what will the Fed, and Ms. Yellen, be looking at to assess labor market conditions? In her press conference, Ms. Yellen listed a “dashboard” of indicators that she watches to gauge the progress the labor market has made in its recovery from the Great Recession. We have represented those indicators in a series of six charts, so you can get a sense of the trends and lingering troubles Ms. Yellen has her eye on.

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What Makes an Employment Report “Strong” or “Weak”?

Severe weather was likely an important factor in the latest employment report from the Bureau of Labor Statistics (BLS), but the good news—for a change—is that the results weren’t terribly weak.

The unemployment rate ticked up to 6.7% in February from 6.6% in January, but that wobble is probably little more than statistical noise.  The big news is that non-farm payrolls rose by a stronger-than-expected 175,000 in February.  Most people who watch these numbers were bracing for a  weaker result, owing to the impact of severe weather.

Yes, the weather in February was worse than usual… yet again. But the timing last month was especially bad: Winter storm Pax, which crippled most of the eastern half of the country, struck during the week in which the BLS conducts its employment surveys. While you might not lose your job because you are snowed in, the BLS will not include it in the payrolls tally unless you actually did paid work during the survey week. The number of people in February who reported having a job but not going to work because of the weather during the survey week was 601,000, compared to just 237,000 in the same month last year. What if an employer planned to start a new hire on February 12 but delayed the start date to the following week because of the storm? That new job won’t count toward the monthly gain in payrolls.

Considering the toll February’s bad weather probably took—the BLS does not provide a direct measure of weather effects—the 175,000 rise in payrolls suggests the labor market continues to strengthen, despite weaker readings (also weather-affected) of 129,000 in January and  84,000 in December.

Just how weak are those numbers? If you follow the economic data in the news, you might get the sense that a jobs report is not strong unless it includes at least a 200,000 gain in payrolls. Last year’s monthly average was 194,000, which would make it slightly-less-than strong, and certainly not impressive. This assessment no doubt contributes to the widespread skepticism that the decline in the unemployment rate, from 10% at the peak to 6.7% in February, overstates the improvement in the labor market.

But it’s worth revisiting assumptions about what constitutes a “strong” or “weak” gain in jobs. For a number of reasons—most of which have nothing to do with the strength or weakness of the economy—our labor force just isn’t growing as fast as it used to. Baby boomers are a huge demographic bulge, and as they retire and leave the workforce in droves, they are offsetting much of the gain in new entrants to the labor force, which itself is not what it used to be.

In order to keep the unemployment rate from rising, the number of new jobs in the economy must match the net growth of the workforce—the difference between the number of new entrants and the number of “leavers.” Of course, some people hold more than one job, but only about 5% of the labor force as of the latest data.

If we want to see overall unemployment decline in the economy—bringing the unemployment rate down—then payroll growth must surpass the net growth of the labor force. There’s certainly a lot of ground to make up: The economy shed over 8.6 million jobs during the recession, and since then there has been a net increase in the workforce of about 1.6 million people. So far in this recovery, the economy has created about 8 million new jobs. So we still need to see bigger gains in employment than increases in the labor force to close the unemployment gap. But what kind of numbers are we talking about?

Take a look at our chart below, which lines up labor force growth and jobs growth. The labor force numbers are erratic from month to month, so we’ve smoothed them using 12-month averages. Every time the blue area rises above the red area, the economy is creating enough jobs to bring down unemployment. Over the last year, jobs growth has exceeded labor force growth by a much wider margin, and more frequently, than it did during the early 2000s, when monthly payrolls gains would regularly surpass 200,000.

Job Growth and Labor Force Growth

Based on the trend in labor force growth since 2012, sustained gains in payrolls in excess of 75,000 per month are enough to reduce the unemployment rate over time. That means the average gains of 194,000 per month we saw last year were quite strong—and even the lackluster 152,000 average so far this year is enough to keep chipping away at the unemployment rate. Of course, the greater the gains in jobs, the faster the unemployment rate will come down.

Mixed Signals on the Labor Market?

Labor MarketFor those who look to the labor market as a guide to the overall strength or weakness of the economy, the latest report from the Bureau of Labor Statistics is a confusing read.

Non-farm payroll employment rose by just 113,000 in January after an anemic 75,000 gain in December. For perspective, the average monthly gain in 2013 was 194,000. The weak December number was widely interpreted as a result of bad weather, but that does not seem to be the case in January: During the week the employment data were collected (including January 12), the weather across the country was not as severe compared to normal as it was in December. So many analysts were actually looking for a bounce back in payrolls for January, making up some of the ground lost in December.

Interpreting the latest results, the New York Times reports that “the labor market has been healing more slowly” compared to the overall economy, but that doesn’t seem to square with the speedy decline in the unemployment rate, now at 6.6%, compared to 10.0% at the peak.

Because the unemployment data measure those who are actively seeking a job, it is possible for the jobless rate to decline if people become discouraged and give up looking for work. This is signaled by a drop in the labor force participation rate. But the participation rate actually rose in January, according to the Bureau of Labor Statistics. The further drop in the unemployment rate therefore suggests an actual improvement in labor market conditions.

So which is it? Is the labor market improving, as signaled by the unemployment rate, or is it weakening, as suggested by the payrolls numbers? The two sets of data are derived from different sources—separate surveys of households and “establishments”—so one set of data could be off the mark. But it is also possible that both are right. Here’s why: The unemployment rate is a lagging indicator of economic activity—it tends to rise or fall only after weakening or strengthening occurs in the overall economy. But payrolls are a coincident indicator—changes tend to occur at the same time as shifts in the overall economy’s growth rate. So the recent improvement in the jobless rate suggests the economy strengthened in the recent past, while the weaker payrolls data could be telling us that the economy is starting to slow right now.

Are there any leading indicators of the labor market—data that could give us a heads-up on changes that are about to happen in the economy? The weekly data on initial claims for unemployment insurance benefits fill that role. They tend to be volatile and unreliable on a short-term basis, but we can smooth out that volatility by looking at averages over a few weeks at a time. The latest four-week moving average, at 333,000, is actually down from the 343,000 average for all of last year. This would support a more positive view of the labor market.

What’s the takeaway from all these different signals? We at AIER suggest that you step back from the daily data flow, which can be erratic and unreliable, and look for the underlying trends in economic activity. Our latest Business Cycle Conditions report, which does just that, shows the economy on track for continued improvement this year.

[Photo: Wikipedia/Brian Harrington Spier]

Marketplace of Ideas

Before we wrap up the week’s news, some guiding wisdom from the immortal Pete Seeger: “I’m convinced that it’s impossible to have education without controversy. People who think that’s false will find themselves trapped.”

  • It could have been worse” has become a common refrain recently when it comes to the legislation cobbled together by Congress. The new farm bill is the latest specimen. The House this week finally passed compromise legislation, after what NPR describes as a “two-year-long legislative saga.” The bill now heads for a vote in the Senate. While a lengthy and complicated piece of legislation, the farm bill can be broken into two broad components—the Supplemental Nutrition Assistance Program (food stamps) and agricultural subsidies. The current legislation cuts spending for both components, but the American Enterprise Institute warns that the changes to the agricultural subsidies program is a bait-and-switch maneuver that could cost taxpayers more in the end. AEI has devoted an entire website to promoting a return to free-market principles for agribusiness: The American Boondoggle.
  • This week’s report on fourth quarter GDP growth shows a slowing of the economy at the end of 2013 to a 3.2% annualized pace from 4.1% in the third quarter. Not many are expressing disappointment about that result. While not stellar compared to the rates achieved before the recession, there seems to be a consensus among analysts and policymakers that any growth rate above 2% may actually be overshooting the economy’s potential, given lingering adjustments from the 2007-08 financial crisis.
  • A new policy initiative from the Obama administration recruits some of the nation’s largest employers to address the problem of long-term unemployment. According to the latest data from the Bureau of Labor Statistics, nearly 40% of unemployed workers are in the long-term category—those looking for a job for 27 weeks or longer. The long-term unemployed face a compounding series of economic hardships, which may be destructive to the productive capacity of the overall economy. Studies suggest that employers tend to be biased against the long-term unemployed, passing over their resumes, regardless of skills or experience, for workers who have held a job more recently. The plight may be especially difficult for older unemployed workers: The Guardian this week takes a closer look programs to assist those aged 55 and up.
  • Finally, it’s that time of the year when people all over the United States, from all different backgrounds, return to a common ritual passed down through generations. That’s right, it’s Super Bowl weekend. What does it mean for the economy? While the economic boon to the host city—or region, in the case of New York/New Jersey this year—is debatable, there are some hard data on the implications for the financial markets: According to the Super Bowl Indicator, U.S. equity markets will have an up year if the winner is an original NFL team or an NFC team. If or an AFC team or a former AFL team wins, equities will suffer. What does that mean for this year’s contest? Bet on the Seattle Seahawks, an NFC team, if you want stocks to rise. However, the last two Super Bowl victories for the Denver Broncos, the AFC team, in 1997 and 1998, corresponded to gains in the S&P 500 of 33% and 29% respectively. Place your bets!

How Do America’s Rich Feel About the Economy?

The state of the U.S. economy often depends on whom you ask. For example, a new piece in the Washington Post says that, according to the nation’s wealthy people, the economy is doing great.

The Post looks at a survey done by the American Affluence Research Center that asks families in the top 10 percent of net worth their opinions on a number of issues. The recent results show that economic sentiment among these families is at their highest levels since 2007.

From the Washington Post:

It shouldn’t be terribly surprising. The stock market is up 24 percent this year. Unemployment among the educated is at very low levels. It stands to reason that the economy looks to be recovering much better if you’re someone with large investment holdings and a high-level job than if you’re scraping by at a lower-wage job and not benefiting from a run-up in asset prices.

Economic sentiment might be lower among the 46 million Americans who, according to a piece in the Atlantic, lived below the poverty line in 2012.

That number, which represents 15 percent of the country, might seem insurmountable, but, according to the piece, the fix for poverty in America could be as easy as giving everyone in the country a $3,000 bonus.

From the Atlantic:

In 2012, those 46.5 million impoverished Americans were, collectively, $175 billion dollars below the poverty line. That figure is equivalent to 1.08 percent of the country’s GDP, one-quarter of the country’s $700 billion military budget, and exactly what we spend on Social Security disability benefits. Finding an optimal way to get $175 billion to these 46.5 million people is all that stands in the way of a country with an official poverty rate of zero.

Using the dataset from the latest Census poverty report, I determined that if we cut a $2,920 check to every single American—adults, children, and retirees—we could cut official poverty in half. 

Of course, there is a caveat to this plan: in order to fund the $3,000 payday for the impoverished, the Atlantic piece suggests increasing taxes the country’s wealthiest citizens, which might knock their economic outlook down a peg.

Read the Washington Post story here. 

Read the Atlantic story here.

An Unreliable Unemployment Rate?

An economics report from the Wall Street Journal suggests that the Fed might not take action on its bond-buying programs this October because of some unusual statistics tied to the country’s unemployment rate.

The piece explains that the Fed has often used the unemployment rate as a barometer of what to do with bond-buying programs and interest rates, but slow growth and a decline in people in the workforce are causing the organization to hold off on its bond decision.

From the Wall Street Journal:

“The unemployment rate is behaving in peculiar ways. It is coming down as people leave the labor force and exit the tallies of those seeking employment. In normal times, the labor force grows as the population grows, and employment must grow in excess of that labor force growth in order to reduce the unemployment rate. Now, because the labor force isn’t growing much, even small employment gains are bringing down the unemployment rate, even though millions of Americans remain parked on the sidelines.”

In other words, the unemployment numbers might not be as a strong an indicator of what the Fed should do about bonds as it has been in the past. This “disconnect makes it very hard to for them to send clear signals or make decisions with conviction.”

Read the full story here.