O, What an Untangled Web: A New Tool for the Classroom

Since the recession began in 2007, unemployment has been central to the discussion on economic conditions. And in fact, the unemployment rate is very important, as policymakers and economists rely on it as a main economic indicator of medium-term trends in labor market conditions. But is this single statistic the best measure of the overall state of the economy, or even of labor market conditions?

Not necessarily, according to researchers at the Federal Reserve Bank of Atlanta. In the short run, the unemployment rate can be misleading, so teachers and students should consider it alongside other statistics. Although it is critical, the unemployment rate is not the only important number to consider when examining labor market conditions.

In 2012, the Federal Reserve Bank of Atlanta embarked on a project to help both policymakers and the general public gain a better understanding of the labor market. The result was a very readable "spider" chart that provides a more comprehensive—yet simple—view of the labor market than does the single unemployment statistic.

What does the spider chart show?
The spider chart allows for a simple visual representation of progress in the labor market. There are four broad categories, and statistics within each of the categories give more detail. The categories are employer behavior, confidence, labor utilization, and leading indicators. Students can gain an understanding of the general trajectory of the labor market by looking at the chart.

The chart maps progress using as the benchmark the prerecession peak in employment from the fourth quarter of 2007, when the unemployment rate was 4.5 percent. The outer ring on the chart represents 2007 conditions, and the inner ring represents the 2009 trough, when unemployment was 10.1 percent.  Outward movement indicates improvement.

Weaving in the numbers
Economists update the spider chart twice a month using data from a variety of sources. The U.S. Bureau of Labor Statistics (BLS) is a valuable source of economic data, and you can use the chart in your classroom to direct students to the BLS website. For example, the BLS publishes the Household Survey (officially called the Current Population Survey, or CPS), which obtains labor force and employment data from households on a monthly basis. The Establishment Survey, also carried out by the BLS, surveys employers for data on employment, hours, and earnings of workers on nonfarm payrolls.

The vacancies, hires, and quits indicators on the chart come from the BLS' Job Openings and Labor Turnover Survey (JOLTS). This survey samples 16,000 U.S. businesses in the public and private sectors to collect data on total employment, openings, hires, quits, layoffs, and other job separations. The U.S. Department of Labor produces other statistics such as the Unemployment Insurance Weekly Claims Report. Introducing students to such surveys allows them to gain a better understanding of different pieces of the labor market.

Trends and implications for labor market developments
At first glance, it is easy to take in the general improvement in the leading indicators section of the web. Leading indicators reveal where the economy is heading in the near future; they generally change before the economy as a whole changes. Making improvements in leading indicators are a necessary first step to grow the economy. Notable developments on the spider chart include improvements in temporary help services employment and initial claims on unemployment insurance. Temporary help services employment is a leading indicator because employers, as the economy recovers, may at first be willing only to hire temporary help. It is thought that employers will some time later end up hiring these workers for full-time positions.

Other indicators look less promising. Utilization measures of improvement have remained weak.  For example, the indicator of marginally attached workers has actually dipped below December 2009 levels. Marginally attached workers are people who have not looked for a job in the past month but are willing and available to work and have searched within the past year. Lags in improvement, such as an increase in the number of marginally attached workers, may have long-term implications for the population, as these workers lose skills, become less desirable to employers, and have lower lifetime earnings.

Dennis Lockhart, president and chief executive officer of the Federal Reserve Bank of Atlanta, used the chart in a February 2013 speech to the University of Tennessee to demonstrate the uneven progress across indicators of labor market conditions. As he noted, uneven developments make it difficult to interpret overall employment conditions.

Why is the unemployment rate not the end-all, be-all?
The unemployment rate is, of course, an important number. It corresponds with one part of the Federal Reserve Bank's dual mandate of promoting stable prices and maximum employment. A high unemployment rate indicates wasted resources, as the unemployed in a population represent people who have the potential to contribute to the economy's output but are not able to do so. In the fourth quarter of 2009, the unemployment rate in the United States peaked at 10.1 percent, and GDP growth was –4 percent, according to the World Bank.

The unemployment rate can increase even when the labor market is improving. For example, the unemployment rate rose from 7.5 percent to 7.6 percent in May 2013, but this increase was due to more people entering the labor market. Individuals encouraged about job prospects have entered or reentered the labor force in response to positive signals, according to Melinda Pitts, director of the Center for Human Capital Studies at the Federal Reserve Bank of Atlanta.

The unemployment rate is calculated by dividing the number of unemployed by the number in the labor force, then multiplying that result by 100. The numerator in unemployment statistics does not include "discouraged workers"—that is, people who want jobs but who have given up looking after unsuccessful searches. That means a lower unemployment rate may be deceiving. The rate could correspond with more discouraged workers in the population, and discouraged workers indicate pessimism about employment opportunities. The unemployment rate is important, but students who are only familiar with this measure of the labor market may not understand other events that are taking place in the economy.

How much can the spider chart tell us?
Although the spider chart uses December 2007 data as a benchmark, it is important to remember that some variables may not return to 2007 levels. There may be a "new normal" for some indicators, noted Pitts. The chart is limited in its use as a tool to track labor markets over the long run, but it is still one step towards providing the Fed, the general public, and students of the economy with a straightforward tool to analyze the labor market.

Questions for teachers

  1. What is the difference between the Household Survey and the Establishment Survey?
  2. Why is employment in temporary help services considered a leading indicator in the Spider Chart?
  3. How can an increase in the unemployment rate be misleading?
  4. What are the long-term consequences of a high unemployment rate?

Related links

By Elizabeth Bruml, an economics major at Emory University in Atlanta, who contributed this article as part of her internship at the Federal Reserve Bank of Atlanta

August 26, 2013