South-Western College Publishing - Economics  
Jobs Drift Downward
Topic Employment, Unemployment, and Inflation
Key Words Unemployment Rate, Nominal Wages, and Real Wages
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Reference ID: A167201668

News Story Sometimes higher unemployment rates do not get as much attention as rising prices. Unemployment seems to hurt only those without a job, but inflation hurts everyone. That might be a short sighted observation. In reality, and in a longer view, the unemployment picture will impact how the economy fairs in the months ahead.

In a recent report the Labor Department said government and businesses added 92,000 jobs in July of 2007. The number was down from June when 126,000 new jobs were added. Analysts had to go back to February to find a worse report. In February only 90,000 jobs were created. The unemployment rate edged upward in July to 4.6 percent from 4.5 percent in June.

The job market depends heavily on business expectations and business willingness to invest in expansion which creates new jobs. When the economy cools, as it has recently, slower job growth is naturally expected. The housing market continues to be one area of worry because of its impact on the credit markets. The recent crash in the sub-prime mortgage market has worsened expectations and caused stock losses on Wall Street.

Still, some are not yet concerned. “The labor market as of now is O.K.,” said Joseph LaVorgna, chief United States economist with Deutsch Bank. “But the issue is, will the current rate of job growth sustain income at a fast enough rate to offset the other factors in the economy that don’t look so good?”

Workers in non-management jobs make up about four-fifths of the work force and they are reportedly making about $17.45 an hour in July of 2007. This number represents wages that are 1.4 percent higher, after adjusting for inflation, than the $17.20 per hour reported in July of 2006. The downside to this wage report is in the growth of nominal wages—the amount employees see in their paychecks—which has declined at the same time inflation is rising. The end result is a fall in real wages.

The White House also casts a rosy picture on the job report. “The job numbers, although slightly lower than the previous month, are still within range,” said Edward P. Lazear, chairman of the White House Council of Economic Advisors. Mr. Lazear referred to the data as “good solid numbers.”

With jobs growth falling and real wages on the decline the question most analysts are asking relates to the American consumer. Consumers, as the real engine of the American economy, contribute about two-thirds of total spending on goods and services. Will consumers be able to sustain a level of spending strong enough to support healthy economic growth?

Questions
Discussion Questions:
1. Discuss the difference between nominal wages and real wages.
2. Visit http://www.bls.gov/cps/cps_faq.htm and create a list that includes all people who are considered unemployed.
Multiple Choice/True False Questions:
1. Nominal wages are wages that have been adjusted for inflation.
  1. True
  2. False
2. A slowing economy often results in a declining job market.

  1. True
  2. False
Source Jeremy Peters, “Jobs Growth Slid in July, Echoing Drift”, The New York Times Online, August 4, 2007.
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