South-Western College Publishing - Economics  

Steady as She Goes
Subject Employment and Unemployment
Topic Employment, Unemployment, and Inflation
Key Words Unemployment, Unemployment Rate, Labor Force Participation Rate, Aggregate Supply
News Story The U.S. Department of Labor reported that the nationís jobless rate remained unchanged in July at 4.5 percent. The General Motors strike, in conjunction with the weakness in the Asian economies combined to lower manufacturing employment by 35,000?the third successive month of decline. Further evidence of growing weakness in the labor market was the drop by nearly 300,000 in employment over the past two months based upon a monthly survey of households. Payroll employment, a measure of aggregate employment derived from a nationwide survey of businesses, grew by just 66,000 last month.

Judging from employment and unemployment data for the past few months, the weakness in the Asian economies has depressed U.S. economic growth somewhat, but not enough to seriously curtail growth. Manufacturing is the sector most directly affected by Asian woes and their impact has not yet spilled over into other sectors. Employment in retail sales grew by 125,000 last month. Jobs in services increased by 65,000, and finance, insurance, and real estate accounted for an additional 32,000 jobs. The recent settlement of the GM strike should boost August employment figures.

Another indication that labor markets have slackened is the drop in the labor force participation rate to 66.9 percent from the record 67.2 percent reached in March. Broad-based labor shortages were reported by the Federal Reserveís survey of economic conditions, with some skilled workers being in especially short supply. The Fedís concern is that labor shortages lead to increased wages and inflation. The Labor Departmentís report provided little support for that concern. Average hourly earnings for production and non-supervisory workers were up just .2 percent in July and 4.2 percent since July 1997.
(Updated August 12, 1998)

Questions
  1. What is the labor force participation rate and how is it calculated?
  2. Describe how the short run aggregate supply would be affected by an increase in labor costs.
  3. What effect will increased labor costs have on the long run aggregate supply curve?
  4. Why is the Federal Reserve concerned about increases in labor costs?
Source John M. Berry, ďU.S. Jobless Rate Unchanged in July,Ē The Washington Post, August 8, 1998.

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