O, What an Untangled Web: A New Tool for the Classroom
Since the recession began in 2007, unemployment has been central to the discussion on economic conditions. And in fact, the unemployment rate is very important, as policymakers and economists rely on it as a main economic indicator of medium-term trends in labor market conditions. But is this single statistic the best measure of the overall state of the economy, or even of labor market conditions?
Not necessarily, according to researchers at the Federal Reserve Bank of Atlanta. In the short run, the unemployment rate can be misleading, so teachers and students should consider it alongside other statistics. Although it is critical, the unemployment rate is not the only important number to consider when examining labor market conditions.
In 2012, the Federal Reserve Bank of Atlanta embarked on a project to help both policymakers and the general public gain a better understanding of the labor market. The result was a very readable "spider" chart that provides a more comprehensive—yet simple—view of the labor market than does the single unemployment statistic.
What does the spider chart show?
The chart maps progress using as the benchmark the prerecession peak in employment from the fourth quarter of 2007, when the unemployment rate was 4.5 percent. The outer ring on the chart represents 2007 conditions, and the inner ring represents the 2009 trough, when unemployment was 10.1 percent. Outward movement indicates improvement.
Weaving in the numbers
The vacancies, hires, and quits indicators on the chart come from the BLS' Job Openings and Labor Turnover Survey (JOLTS). This survey samples 16,000 U.S. businesses in the public and private sectors to collect data on total employment, openings, hires, quits, layoffs, and other job separations. The U.S. Department of Labor produces other statistics such as the Unemployment Insurance Weekly Claims Report. Introducing students to such surveys allows them to gain a better understanding of different pieces of the labor market.
Trends and implications for labor market developments
Other indicators look less promising. Utilization measures of improvement have remained weak. For example, the indicator of marginally attached workers has actually dipped below December 2009 levels. Marginally attached workers are people who have not looked for a job in the past month but are willing and available to work and have searched within the past year. Lags in improvement, such as an increase in the number of marginally attached workers, may have long-term implications for the population, as these workers lose skills, become less desirable to employers, and have lower lifetime earnings.
Dennis Lockhart, president and chief executive officer of the Federal Reserve Bank of Atlanta, used the chart in a February 2013 speech to the University of Tennessee to demonstrate the uneven progress across indicators of labor market conditions. As he noted, uneven developments make it difficult to interpret overall employment conditions.
Why is the unemployment rate not the end-all, be-all?
The unemployment rate can increase even when the labor market is improving. For example, the unemployment rate rose from 7.5 percent to 7.6 percent in May 2013, but this increase was due to more people entering the labor market. Individuals encouraged about job prospects have entered or reentered the labor force in response to positive signals, according to Melinda Pitts, director of the Center for Human Capital Studies at the Federal Reserve Bank of Atlanta.
The unemployment rate is calculated by dividing the number of unemployed by the number in the labor force, then multiplying that result by 100. The numerator in unemployment statistics does not include "discouraged workers"—that is, people who want jobs but who have given up looking after unsuccessful searches. That means a lower unemployment rate may be deceiving. The rate could correspond with more discouraged workers in the population, and discouraged workers indicate pessimism about employment opportunities. The unemployment rate is important, but students who are only familiar with this measure of the labor market may not understand other events that are taking place in the economy.
How much can the spider chart tell us?
Questions for teachers
By Elizabeth Bruml, an economics major at Emory University in Atlanta, who contributed this article as part of her internship at the Federal Reserve Bank of Atlanta
August 26, 2013