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The first Friday of every month sees the Bureau of Labor Statistics (BLS) reveal the previous month’s unemployment rate. Since the Great Recession of 2008 the BLS’s monthly announcements have been anticipated by political actors who wish to use the unemployment numbers to advance their agendas. The media also provides a lot of coverage of the recent unemployment data and use it to measure the health of the economy and the pace of America’s economic recovery. Last week the unemployment rate for December was announced as 6.7%, which is the lowest unemployment rate since October 2008. The initial reaction was to treat this as good news since the unemployment rate has fallen since 2010, when it reached a height of 9.9%. However, economists expressed worry that the unemployment rate is not reflecting actual events in the economy because the economy only added 74,000 jobs in December and the reason the unemployment rate is going down is because fewer Americans are looking for work.
Deciphering unemployment statistics can be difficult and extempers usually draw several questions a year that ask them to interpret unemployment data and what that data indicates about the health of the American economy. This topic brief will provide an explanation of how unemployment is calculated and different types of unemployment, break down the latest unemployment numbers, and discuss the political debate surrounding an extension of unemployment benefits for those Americans that have seen their benefits expire at the end of 2013.
Readers are also encouraged to use the links below and in the related R&D to bolster their files about this topic
Calculating Unemployment
In order to talk about unemployment it is important that you learn how the unemployment rate is calculated and what it represents. Each month the BLS conducts a survey of the American workforce through interviews, usually on the telephone. The BLS typically surveys at least 60,000 households and tries to ensure that it is getting a diverse sample size that encompasses different ethnicities and gender groups. This might seem like an unusual way to measure unemployment, but it is not possible for the BLS to track down every worker in America and evaluate whether or not they are employed. This system is an imperfect, but statistically significant way to measure the unemployment rate. If you want to cut something for your files that breaks down the way unemployment is calculated, then click on this link which will send you to the BLS website and provide you with an overview of the technical aspects of measuring unemployment.
The unemployment rate takes the number of Americans that are currently unemployed and divides it by the number of Americans in the labor force. The number of Americans in the labor force is composed of the number of Americans that are employed and unemployed. This produces a percentage, which creates the unemployment data that you see quoted in newspapers and magazines each month. However, there are some caveats that extempers should be aware of in the unemployment data and this concerns what the BLS considers employed and unemployed. The BLS only counts Americans as part of the labor force if they are over sixteen years of age. The BLS considers someone employed if they are working for pay for at least one hour a week, are self-employed, or are working for fifteen hours or more a week without pay in a family enterprise. Those Americans that are unemployed are those that are actively seeking a job or are waiting to begin or return to a job if they had been laid off from a previous job. The criteria of actively seeking a job is very important for extempers to understand. If an American is not looking for work or has given up looking for a job then they do not factor into the unemployment rate. This means that the unemployment rate does not completely measure the number of Americans that are out of work because it only counts those Americans that are hitting the pavement, sitting for interviews, and trying to find a job.
Extempers should also be aware that there are four different types of unemployment: frictional, seasonal, structural/technological, and cyclical. Frictional unemployment is the type of unemployment that happens when a worker decides to leave one job for another for reasons related to family, better pay, or other circumstances. During this transition, a worker may not have a job for a few weeks or maybe months, and this counts as a type of unemployment. Seasonal unemployment takes place in certain industries, like construction or agriculture, where certain jobs are best performed in a particular climate. For example, the construction and agriculture industries do more work in the spring and summer than they do in the fall or winter when the weather gets colder. As a result, these workers end up without work during certain seasons and this produces what is called seasonal unemployment. Structural/technological unemployment occurs when an industry eliminates jobs because of automation or restructuring, which creates layoffs. This type of change also naturally occurs in the economy and has taken place for centuries. For example, the rise of the automobile eliminated the horse and buggy industry as a major producer in the economy. Globalization has also produced a great deal of structural change in the economy because some industries, like the textile industry, have relocated abroad and left towns in the Carolinas and other Southern states with large pockets of unemployed workers. Dealing with workers that are structurally and technologically unemployed is something that government policymakers wrestle with. One of the solutions that is often proposed is to retrain these workers, but the problem is that retraining can be costly and lengthy and some workers who are nearing retirement may not be attractive candidates for future jobs and/or may not see the point in getting retrained. Finally, cyclical unemployment is the worst kind of unemployment and should send up red flags in your mind if you see it mentioned. Cyclical unemployment occurs when industries are making cutbacks in their workforce due to a bad economy. When businesses make less money they will layoff their workforce to preserve profit margins. High rates of cyclical unemployment are thereby tied to economic recessions and a poor economic climate for the country in question.
So, what is a healthy rate of unemployment? Economists have traditionally argued that an unemployment rate of 5% or lower constitutes “full employment” and is what nations should aspire to. Now, you might wonder why 5% or lower unemployment is deemed “full employment” because there are still workers that are unemployed. The answer to this query is that there will always be people that are unemployed in an economy due to frictional factors (which were discussed above), changes in industry, or people that try to look for work, but businesses deem unemployable because of their work history, physical or mental issues, or lack of skills for the jobs they are applying to. If these people are looking for work but cannot find it, then they classify as part of the unemployment rate. The U.S. economy has rarely achieved anything resembling a 0% unemployment rate. The Second World War saw unemployment fall below 1%, but it never got to 0%. The last time that the U.S. economy had rates of unemployment below 5% was 2007, but as CNN points out on January 10th, the Great Recession wiped out 8.7 million jobs and many of those jobs have yet to return to the economy and may never come back.
The Recent Unemployment Data
As stated in the preview of this topic brief, the latest unemployment data showed a new unemployment rate of 6.7%, which is down from 7% in November. The CNN article previously cited explains that the economy only added 74,000 jobs, which was well under economists estimate that the economy would add 193,000 jobs in December. During 2013, the economy added 2.2 million jobs, which was on the same level as 2012, but there are worries that the recent unemployment data shows that the economic recovery may be slowing or not proceeding as quickly as expected. Economists expected the unemployment rate to remain at 7% due to the hiring that businesses would engage in and that more Americans would remain looking for work, but the drop to 6.7% happened because more Americans are leaving the labor force. CNN explains that this might be due to retirement or people enrolling in education programs to acquire new skills, but most of it is due to Americans becoming discouraged about the state of the labor market and not looking for jobs. Only 62.8% of the adult population is currently in the labor force, which is the lowest labor force participation rate since 1978.
The Associated Press on January 10th adds that December was the weakest hiring month in three years and that the number of Americans in the labor force could decline in the January numbers if the 1.3 million Americans that have exhausted their emergency unemployment benefits do not seek work. Those on unemployment have to demonstrate that they are looking for work in order to acquire benefits, so if these benefits expire then it could create a situation where fewer workers are seeking employment. The article goes on to add that Michael Hanson, an economist at Bank of American Merrill Lynch, thinks that part of the weak hiring was due to the polar vortex and colder temperatures that blanketed much of the country in December. He points out that the construction industry cut 16,000 jobs and the cold weather may have led to industry hiring 75,000 fewer employees. However, other industries in the last month saw layoffs, like accounting and bookkeeping, which shed 24,700 jobs, and performing arts and spectactor sports cutting 11,6000 jobs. The movie industry also shed 13,700 jobs, the healthcare industry surprisingly cut 6,000 jobs, and the government cut 13,000 positions. These might be one off phenomena or they may attest to slowing economic growth.
One of the worrying signs about the unemployment data is the number of Americans that are part of the long-term unemployed, or those who have been unemployed for more than twenty-six weeks. The Pew Research Center on January 6th explains that during the height of the Great Recession there are 6.7 million Americans that fit this description, which were 48.1% of the total number of unemployed. Since April 2010 these numbers have declined, but there are still sizeable numbers of Americans that have not been able to find full-time work or jobs that are comparable with the jobs they lost during the Great Recession. Not having a job is a psychological blow for many Americans who wish to contribute to the economy and it can also make it hard on Americans that have families to support. The Huffington Post on January 10th explains that 347,000 people dropped out of the labor force in December, which means that they stopped looking for work. These Americans who are out of work call into question the assertions of The Chicago Tribune of January 10th, which says that consumer spending and a rise in exports suggests that the economy ended 2013 on strong footing. There is a rising sentiment in the United States that the current economy recovery is benefitting top earners, but that it is not trickling down to the masses as evidenced by rising income inequality in the country. Sensing a political advantage, President Barack Obama and Democrats have made the fight against income inequality one of their major themes for the 2014 midterm elections and President Obama is likely to discuss raising the minimum wage and other proposals to close the income inequality gap in his State of the Union Address.
Another worrying sign from the unemployment statistics is what it means for Federal Reserve policymaking. The Federal Reserve has given signals that it will begin to taper its “quantitative easing” policy of buying bonds and other assets to keep interest rates low and put more money into the economy. The Federal Reserve had indicated that it would move away from this policy when unemployment reached 6.5%, but now the Fed is sending signals that it will not follow through with this because the unemployment data, since it does not count those Americans who are not looking for work, is not an accurate reflection of the economy. This means that lower interest rates could persist for longer periods that analysts had anticipated. Bloomberg on January 10th reveals that the jobs report shows that the United States is not getting near a normal economy and that if long-term rates of unemployment persist it could do damage to the economy in terms of the country’s productive capacity and the ability of workers to acquire new jobs. Businesses are hesitant to hire workers that have been unemployed for long periods of time, so the longer a worker is unemployed it becomes more difficult for them to find a new job.
Extending Unemployment Benefits
The most significant political issue surrounding unemployment right now is whether the federal government should extend emergency unemployment benefits to those Americans that have been unemployed for more than twenty-six weeks and have exhausted their federal-state unemployment benefits. Workers that have been laid off from their jobs can seek unemployment benefits and many exhaust these benefits after twenty-six weeks. USA Today on January 7th explains that Congress enacted the Emergency Unemployment Compensation program under President George W. Bush in 2008 to provide relief to Americans that exhausted their twenty-six week benefits. States were put into different tiers based on their rates of seasonal unemployment and workers could acquire a total of forty-seven weeks of benefits under the system. This has the effect of providing workers with coverage for up to seventy-three weeks. The Wall Street Journal on December 20th writes that emergency benefits usually provide $300 a week to workers and this article provides a great chart for extempers to measure the percentage of workers in each of the fifty states that are using emergency unemployment benefits. The reason an extension has become an issue is that Congress did not extend the Emergency Unemployment Compensation program as part of the recent budget deal negotiated by Representative Paul Ryan (R-WI) and Senator Patty Murray (D-WA). This deal, which The Los Angeles Times of December 11th breaks down, set 2014 spending at $1.012 trillion, but has come under fire after it was passed because it ignored the long-term unemployed, reduced federal employee retiree benefits, cut cost-of-living adjustments for military retirees, and placed new fees on airline travel.
President Obama and Democrats have argued that an extension is necessary due to the weak nature of the employment market and that many Americans are still suffering. Currently, there are 1.3 million Americans that have lost their unemployment benefits due to the time limit on them expiring. The Center for American Progress on January 10th provides five reasons for extending unemployment benefits, emphasizing that Congress has offered an extension of emergency benefits in every major recession since the 1950s and that the typical worker has been out of work longer than at any time since March 2004. President Obama has proposed that there be a three-month extension for unemployment benefits, but Politico on January 8th explains that Democrats are moving toward a full year extension of benefits, which would cost $25 billion. Senate Majority Leader Harry Reid (D-NV) argues that there are economic benefits to extending unemployment, arguing that for every dollar that the government spends on unemployment that the gross domestic product (GDP) increases by $1.50. U.S. News and World Report on January 2nd notes that the National Employment Law Project says that unemployment benefits in 2012 lifted 2.5 million Americans out of poverty, 446,000 of which were children. The Hill on January 7th reports that Democrats also see an unemployment extension as a way to emphasize their message on income inequality and they have tied an extension of unemployment benefits to a campaign to raise the national minimum wage, a topic that we have already discussed at Extemp Central in a previous topic brief. Democrats also argue that the budget deficit picture is getting better and this reduces the power of Republican arguments that an unemployment benefits extension cannot be borrowed for. The Daily Beast on January 10th explains that the decline in defense spending due to the winding down of operations in Iraq and Afghanistan, coupled with the sequester have reduced the budget deficit by over 50% over the last four years and there is reason to expect that the initial projection of a budget deficit of $750 billion in the 2013-2014 fiscal year will be lower than expected.
Republicans argue that they are not opposed to an extension of unemployment benefits, but they want the cost of the benefits to be paid for with offsets in other government spending. House Speaker John Boehner (R-OH) has said that he wants the White House to explain how it would pay for an unemployment benefits extension. This fits with the Republican political narrative of recent years over fiscal responsibility, which produced the government shutdown last fall and has produced a few crisis over the debt ceiling. The Washington Post on January 9th noted that six Republicans voted with Democrats to break a filibuster to consider an unemployment benefit extension in the chamber, but they have tied their support to working out a way to pay for a benefits extension, whether it be for three months, which would cost $6.5 billion, or a full year, which carries the $25 billion price tag that Reid is asking for. The Politico article previously cited notes that some Republicans have proposed ways to offset the cost, but have been deemed as non-starters by Reid. For example, Senator Kelly Ayotte (R-NH) has proposed requiring tax filers to have a Social Security number to claim a child tax credit, which she argues would generate $20 billion in savings over ten years. The Washington Examiner of January 9th explains that the lack of Social Security enforcement of the program has created $4.2 billion in assistance to illegal immigrants. Senate Minority Leader Mitch McConnell (R-KY) has also proposed delaying the individual mandate in the Affordable Care Act to pay for the benefits, but this is obviously off the table for the Democratic leadership as well. One of the problems for Republicans, though, is that a benefits extension is popular with voters, as Politico reports on January 9th that 58% of voters favor an unemployment benefit extension versus 37% that oppose. 54% of Republicans oppose the measure, but 54% of independents support it. The Christian Science Monitor explains on January 7th that the Republican Party also has to find a way to escape the stereotype that it is a party that does not care about the poor. Republicans would counter that they are not insensitive to the poor and that they do not want unemployment benefits becoming a new welfare program. In their mind, the economic recovery needs to proceed faster. Real Clear Markets on January 10th has an opinion-editorial from Wayne Brough, the Chief Economist and Vice-President of Research at FreedomWorkers that lays out this conservative view. According to Brough, President Obama’s policies like the Affordable Care Act, the Environmental Protection Agency’s (EPA) CO2 regulations, and other regulatory policies have dampened the enthusiasm of businesses to hire new workers. He suggests that the government needs to pursue a more favorable attitude toward business that encourages pro-growth policies that will create more jobs and put people back to work.
It is very likely that there will be an unemployment benefits extension of some sort. The Democrats have a favorable hand in negotiating for one because the public backs an extension and it is much easier to shape one’s political rhetoric when you are seen as helping those in need. The Republicans also want to avoid negative press going into the 2014 midterm elections, where they hope they can increase their majority in the House and capture the U.S. Senate. The Christian Science Monitor suggests on January 10th that Congress should look carefully at loopholes in the tax code and close some of the tax credits that it has granted for a variety of behaviors. The Washington Post of January 9th has also outlined a potential deal whereby Democrats would win an eleven month extension of unemployment benefits and Republicans would get promises of spending cuts that would go into effect in a decade. This would provide Democrats with the extension they want and also give Republicans fiscal cover for supporting a deal.
In closing, the unemployment situation in the United States is very tricky right now. The Great Recession’s effects are still being felt and there is a lot of uncertainty about the economic impact of the Affordable Care Act, especially once the employer mandate goes into force next year. The best way to answer unemployment question is to put yourself in the role that the question centers on. If the question asks about business, then try to look at unemployment from the perspective of a business leader and why they might be hesitant to hire and what they would need to hire more workers. If it asks what the government should do, you want to weigh the costs of an unemployment extension versus the benefits for millions of Americans that are discouraged and looking for work. It may also be worth explaining American trade policy and if the decades of free trade have produced sizable benefits for the American workforce. The challenge for the United States in this decade will be to produce a vibrant economy in light of changing global conditions and low-cost producers like China and move to a post-service economy where education and skills will be put to a premium. These will call for long-term policy changes and visions, which is difficult in an era that focuses on the short-term, but these policy options are what extempers should investigate as they seek to answer future questions about unemployment and how America can overcome the ill-effects of the Great Recession.