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Unemployment Turns Up
Subject Unemployment
Topic Employment, Unemployment, and Inflation
Key Words Employment, Unemployment, Labor Force, Interest Rate
News Story

Hope for a turnaround in the economy was dashed by data reported by the Labor Department. Although the monthly unemployment rate rose only slightly, to 4.5 percent in June from 4.4 percent in May, the disturbing statistic was the decline in employment in the service sector - the first decline in 4 decades. In total 114,000 jobs were lost, mostly in the manufacturing sector. The job loss in the private sector in the second quarter was greater than in any quarter since the last recession in 1990-91. The unemployment rate would be even higher but for the decline in the size of the labor force.

The economy has been shedding jobs for the last three months at an average rate of 117,000 per month. For the same period last year employment grew by an average of 167,000 per month. Manufacturing has been the hardest hit. Over the last year, more than 4 percent of the nation's manufacturing jobs have been eliminated. The decline in manufacturing spread last month to wholesaling and to the transportation industry which delivers manufactured goods. This month the service sector felt the softening of the economy. Although jobs in this sector have grown every quarter since the second quarter of 1958, the service sector lost 21,000 jobs in the second quarter of 2001. The job losses were mainly among temporary workers.

Job losses of this magnitude should have pushed the unemployment rate up to 5 percent, according to some economists. While there were sharp jumps in the unemployment rate for Hispanic and black workers, the aggregate unemployment rate showed a very modest increase of 0.1 percent. What prevented a larger rise in the unemployment rate was that since January approximately 600,000 people have left the labor force.

There are still some optimists who believe that the slowdown has ended. Instead of focusing on the jobs report, their optimism stems from data on auto sales, consumer spending and home construction. In addition, many believe that the Federal Reserve's six interest rate cuts coupled with the tax rebate checks that are just being mailed, will provide the needed stimulus.

(Updated August 1, 2001)

Questions
1. The article points to the contraction of the labor force as mitigating the effect of a large job loss on the unemployment rate. Explain how the unemployment rate is calculated. Show how the unemployment rate can even fall when there are job losses.
2. One chief investment officer for a Wall Street firm was quoted as saying that the unemployment rate understates true unemployment. Do you agree? Disagree? Explain your answer.
3. Why is the unemployment rate higher for Hispanic and black workers?
Source Louis Uchitelle, "Broad Job losses Last Month Show Slump is Lingering," The New York Times, July 7, 2001.

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