Adding to the Confusion
Subject Unemployment
Topic Employment, Unemployment, and Inflation
Key Words Employment, Unemployment, Exports
News Story

The Labor Department's monthly labor market report showed that the nation's unemployment rate fell in May to 4.4 percent. A fall in the unemployment rate means that the economy is improving? Not necessarily. The unemployment rate is a ratio of the number of people looking for work divided by the size of the labor force. The fall in May's unemployment rate was the result of a fall in the size of the labor force. May's labor market report is an indication of the economy's weakness rather than its strength.

Approximately 500,000 workers dropped out of the labor force in May, even though the number of jobs fell by only 250,000. This is explained by the fact that when employers stop hiring, the number of people looking for work often decreases as word circulates that it is more and more difficult to find employment.

Economists are surprised that after nearly a year of substantially reduced economic growth, the unemployment rate has only increased by one-half percent. The employment/unemployment report provides evidence that the economy is weak, but not in recession. The manufacturing sector is, however, in recession. Factory payrolls declined by 124,000 in May, the tenth consecutive month of decline. Since December, manufacturing has lost 370,000 jobs. Employment increases in several service industries, construction, and the oil and gas industry mitigated the effect of the manufacturing decline.

Although the forecast is for continued weakness in the current quarter, several economists are projecting that economic growth will accelerate in the fall largely because of the combination of interest rate decreases and recently enacted tax cuts. This year's share of the tax cut will come in the form of rebate checks - up to $300 for a single filer and $600 for a couple. These checks are to be mailed starting in August and will give a lift to economic growth for the last quarter of this year and the first quarter of next year. After that, the effect of the Fed's interest rate cuts should kick in.

(Updated July 1, 2001)

1. What is a discouraged worker? How do the number of discouraged workers behave over the course of the business cycle?
2. Suppose that the number of discouraged workers increases, how is the unemployment rate affected?
3. Current projections call for the economy to improve in the last quarter of this year and next year. What are the reasons cited for the increase?
Source John M. Berry, "Joblessness Falls, but So Does Job Count," The Washington Post, June 2, 2001.

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