July 05, 2002

Unemployment Continues to Creep Upward

Why does the unemployment rate keep rising, if indeed we are in a recovery? First of all, we are not in that much of a recovery--demand and output are not growing that fast. Second, recall that only recently did President Bush agree to extend the duration of unemployment benefits. In the aftermath of any extension of unemployment benefit duration, the unemployment rate tends to rise by half a percentage point or so relatively to what it would have been: people take longer to search for new jobs (and on average do manage to get better jobs as a result of taking longer to search.


WSJ.com - Economy

WASHINGTON -- The U.S. unemployment rate edged up to 5.9% last month as employers remained reluctant to add new workers to their payrolls. The latest numbers suggest the economic recovery is too fragile to permit the Federal Reserve to raise interest rates anytime soon. The Labor Department's latest snapshot of the job market released Friday also showed that 36,000 jobs were created in June after a revised increase of 24,000 in May. But job growth wasn't strong enough to prevent the unemployment rate from rising in June from May's 5.8% rate.

Unemployment Rate Rises to 5.9% As Jobs Creation Remains Tepid

A WALL STREET JOURNAL ONLINE NEWS ROUNDUP

WASHINGTON -- The U.S. unemployment rate edged up to 5.9% last month as employers remained reluctant to add new workers to their payrolls. The latest numbers suggest the economic recovery is too fragile to permit the Federal Reserve to raise interest rates anytime soon.

The Labor Department's latest snapshot of the job market released Friday also showed that 36,000 jobs were created in June after a revised increase of 24,000 in May. But job growth wasn't strong enough to prevent the unemployment rate from rising in June from May's 5.8% rate.

Average hourly earnings, meanwhile, grew at the fastest rate in seven months.

[Chart of unemployment rate]

Although the increase in the jobless rate was in line with economists' expectations, many had forecast much stronger job growth with payrolls increasing by some 75,000. Job losses in manufacturing and in the retail sector, including car dealerships and department stores, blunted gains elsewhere, making for tepid job creation during the month.

The numbers showed the labor market remained in "a holding pattern," said Lois Orr, a Labor Department official.

As other parts of the economy are gaining ground after the slump, the labor market is continuing to suffer from some of the fallout. Companies whose profits and revenues took a hit during the slump have been worried about the recovery's staying power and have been wary of making big commitments in hiring and in capital investment.

"There is just not the confidence in the recovery on the part of employers to venture out and start reloading -- hiring back workers," said economist Ken Mayland, president of ClearView Economics.

The U.S. economy grew rapidly in the first three months of the year, with the gross domestic product expanding by 6.1%. But the growth is likely to have slowed to a rate of less than 2% in the second quarter, economists say. U.S. stock prices, meanwhile, have plummeted in reaction to a wave of corporate accounting scandals.

Fed policy makers, as a result, have signaled they are in no hurry to start raising interest rates. The U.S. central bank held its key interest rate at a 40-year low of 1.75% last week, saying the recovery has lost momentum. It said it expects consumer and business spending to "pick up over coming quarters ... but the degree of the strengthening remains uncertain." Investors, as a result, expect the Fed to hold interest rates steady for the time being.

The economic uncertainty has made employers reluctant to hire new workers, just as they were in the aftermath of the 1991 recession. Nonfarm payrolls have shrunk by an average of 25,000 a month this year, for example. In the first 12 months after the 1991 recession ended, payrolls declined by an average of 18,000 a month.

Until the economy dipped into recession last year, employers had been expanding payrolls by an average of 200,000 a month. John Lonski, an economist with Moody's Investors Services, said job growth isn't likely to reach that level until the end of the year. The unemployment rate, as a result, is likely to climb to 6% before it stabilizes, he said.

The Labor Department attributed most of the increase in payrolls in June to the services industry, which added 33,000 jobs. Ms. Orr, who is the acting commissioner of the Bureau of Labor Statistics, said the services jobs growth was concentrated in health sector, primarily in hospitals.

The manufacturing industry, however, continued to lose jobs. Manufacturing firms cut 23,000 jobs in June. From the beginning of the recession until January, the industry had been losing an average of 115,000 jobs a month. Still, the industry appeared to be rebounding: Manufacturing workers put in longer hours, with factory overtime increasing six minutes to 4.3 hours.

The employment report suggested that inflation risks may be growing. Average hourly earnings rose six cents, or 0.4%, to $14.76 in June after a 0.1% increase in May. That marked the biggest increase in seven months. Wage growth, however, has slowed in year-to-year terms this year: the increase in June was 3.3%, down from a peak of 4.4% late last year.

The average work week increased slightly, another sign the economy is recovering: In June, the week lasted 34.3 hours, up six minutes from May.

The government on Wednesday reported that new claims for unemployment benefits dropped to a 15-month low last week, suggesting that companies are reducing layoffs.

But economists said that even if companies reduce the speed at which they lay off workers, the jobless rate probably would continue to rise. They said it would take time for companies to feel more secure about the economic recovery and step up hiring.

Posted by DeLong at July 5, 2002 11:24 PM | TrackBack

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