Economically Speaking: Labor Markets and Today's Economy

Economically Speaking

Labor markets and today's economy

photo of people filling out applicationsA labor market is a market like any other, consisting of buyers and sellers, and governed by the laws of supply and demand. In a circular flow model of an economy, households supply labor, and businesses buy it (see the flow chart). Wages are the price of labor, and households use their wages to demand goods and services, which are supplied by businesses.

Households and businesses interact in the market for labor and other production factors (the factor market) and the market for goods and services (the product market). Households are sellers in the factor market and buyers in the product market, while businesses are buyers in the factor market and sellers in the product market.

As in other markets, the interaction of demand and supply in the labor market determines the level of wages and employment. During an economic downturn such as the current recession, consumption and investment decline; therefore, the demand for labor declines, resulting in a lower level of employment. Wages also fall because workers will accept lower wages. Both the equilibrium wage and the quantity of labor fall.

Related Links
On this site:
Activity for high school students
"Back to School" lesson plan from Katrina's Classroom
On the Web:
Current Employment Statistics (BLS)
Current Population Survey (BLS)
Unemployment Insurance Weekly Claims Report (Department of Labor)
Labor Productivity and Costs (BLS)
Economic Indicators (By the Numbers) (FRB New York)
Lesson plan on employment (FRB St. Louis)
Lesson plan on unemployment (FRB St. Louis)

Labor market indicators
Four major indicators help economists understand trends in labor markets.

  • The establishment payroll survey, (Current Employment Statistics) from the U.S. Bureau of Labor Statistics (BLS). contacts 150,000 businesses each month regarding employment, hours, and earnings of workers on nonfarm payrolls, The report provides insight into future levels of economic activity.
  • The unemployment rate—the proportion of unemployed people in the labor force—is determined by the Current Population Survey, conducted by the Census Bureau for the BLS. The survey gathers information from 60,000 households each month about unemployed people by occupation, industry, duration of unemployment, reason for unemployment, and methods used to find employment.
  • The Unemployment Insurance Weekly Claims Report from the U.S. Department of Labor shows the total number of people signing up to receive unemployment benefits, including new first-time applications and continuing claims.
  • The BLS's Major Sector Productivity and Costs program publishes quarterly productivity measures of output per hour and unit labor costs for the U.S. business, nonfarm business, and manufacturing sectors. This information shows the long-term uptrend in the output per unit hour of labor, which has accelerated in the last several decades.

Current information and trends
One of the most painful symptoms of a recession is unemployment. And with millions of people losing their jobs since the start of the recession, everyone is watching the labor markets, the Fed included. More than 8 million jobs have been lost in the United States from December 2007 through October 2009. While evidence is mounting that the worst of the economic downturn has occurred, an improvement in employment levels typically lags economic expansion, making labor markets a sensitive issue well after the initial signs of economic recovery.

The employment outlook is particularly significant for young people. The economy that emerges from this recession may not resemble the prerecession economy. Jobs lost in some sectors, such as manufacturing, may not fully return; rather, labor could be reallocated into other sectors, and the process could occur slowly.

Where job losses occurred
While the unemployment pain in this recession has been broad based, certain sectors have been hit particularly hard. The most prominent are construction and manufacturing, which employ a disproportionate number of men.

The share of the jobs lost in construction and manufacturing during the recession is out of proportion to the share of jobs these male-dominated sectors represent in the economy. As a result, some have called this downturn a "mancession." Prior to the recession, construction and manufacturing together accounted for a little more than 15 percent of employment. Their job losses during the recession, however, account for more than 40 percent of all U.S. job losses.

The inventory of unsold homes on the market remains high. Much of this inventory will have to be purchased before construction employment returns to any levels considered normal. Between 1965 and 2000, manufacturing employment generally fluctuated between 16.5 and 19.5 million jobs. The number of manufacturing jobs fell to just over 14 million in the first years of this decade and has continued to drift downward. The harsh financial constraints of this recession appear to have accelerated this decline.

This recession has had a severe impact not only on the number of jobs but also on the number of hours worked. For example, the average manufacturing workweek has fallen below 40 hours for the first time since 1983. And the number of people working part-time for economic reasons has increased more in this recession than in any since the BLS started tracking that information.

If one considers the people who would like a job but have stopped looking—so-called discouraged workers—and those who are working fewer hours than they want, the unemployment rate would move from the official rate (in October 2009) of 10.2 percent to 17.5 percent.

Slow recovery
Clearly, it will be some time before the number of jobs in the economy returns to prerecession levels. Because of the high level of part-time employment, employers may increase work hours without adding to their overall number of full-time workers. Businesses seem inclined to defer hiring and focus on increasing productivity (more output per worker) until they are more certain about increasing future demand for goods and services.

Firms always have incentives to improve efficiency and keep a lid on costs—including labor costs. The last two recoveries involved unusually long periods of GDP growth accomplished through productivity gains instead of adding jobs, and there is little evidence that the coming recovery will break that pattern.

Solutions to the unemployment problem
Fortunately, most people who are directly affected by job loss are eligible for the short-term income support of unemployment insurance. Benefits through that program have been extended four times since July 2008.

To find work, some of the unemployed will have to look for a job in a new field. Therefore, now more than ever, workers need an educational infrastructure that will promote their retraining to suit the needs of employers in the new economy.

Community colleges serve an important role in preparing nontraditional, often older, students for new careers and in providing targeted training on a contract basis with private companies. In the fall of 2007, more than a third of all postsecondary students were enrolled in community colleges, according to the National Center for Education Statistics. Since the early 1960s, enrollment in community colleges increased by about 750 percent—roughly four times the growth rate of enrollment in public and private four-year institutions. The role that community colleges play in retooling the workforce can be seen by the bumps in enrollment during recessions.

Recognizing that many of the nation's unemployed will need to retool to reenter the labor market, the federal government has allocated approximately $24 billion of stimulus money for training and education, according to the Workforce Alliance.

The long-term answer to unemployment is restoration of a healthy, balanced, and growing economy capable of producing sustainable employment. This objective will require structural adjustment in the economy and personal adjustment for many workers. Education will play a vital role in preparing students for the workforce with appropriate skills and knowledge to meet the new demands of employers and the economy.

By Sara Messina, economic and financial education specialist, Jacksonville Branch; adapted from an August 26, 2009, speech by Atlanta Fed President Dennis Lockhart and remarks by Atlanta Fed Assistant Vice President Michael Chriszt at the "Evening with the Fed" workshop, Jacksonville, Fla., September 24, 2009.

November 9, 2009