The full text on this page is automatically extracted from the file linked above and may contain errors and inconsistencies.
JD)®]P)@lLfttIITm®1ffi1t
IF
§@IITl
IF
August 19, 1977
Jobless
and Benefits
What is the lowest rate of unemployment attainable without accelerated inflation, under the institutional. structure existing today? This
full-employment unemployment
rate (FEU)was estimated at about
4.0 percent by t,he Council of Economic Advisers'in the early 1960's,
but another Council came up with a
4.9-percent estimate early this year.
That shift reflects demographic and
other changesthat have occurred
over the past decade arid a half.
However, other factors not included in the Council's calculations
suggestan even higher fullemployment unemployment ratesuch as the tendency of the jobless
rate to rise as improvements are
made in the unemploymentinsurance (UI) program.
Someanalystsstill tend to think of
the 4.0-percent rate as consistent
with full employment-and price
stability, but they tend to ignore the
many recent changesthat have affected the sex-agecomposition of
the labor force and the movements
of workers in and out of jobs, and in
and out of the labor force. Women
and teenagers have come to account for a larger proportion of the
workforce, and these groups historically have had higher-than-average
frictional unemployment. Their increasedimportance in the labor
force thus tends to raise the overall
jobless rate associatedwith a given
degree of labor-market tightness
and full employment. The current
6.9-percent unemployment rate
therefore in part reflects the inade-
quate current businessrecovery,
and in part the larger unemployment that today appears consistent
with a given degree of labor-market
tightness.
Teenagersand women
Teenagershistorically have experienced a substantial amount of joblessness.Young untrained individuals generally spend more time than
older workers learning about job
opportunities and searchingfor suitable employment. They generally
experience high turnover rates as
they experiment with different occupations and employers. Moreover, minimum-wage legislation
may adversely affect employment,
becausefirms willtend to reduce
their hiring of untrained workers
whose productivity lags behind the
wagesthey must be paid. In addition, the teenage FEUrate appears
to be higher now than it was a
decade or two ago, becauseschoolenrollment rates have risen, and
students are more likely than other
youths to move in and out of the
job market.
The higher incidence of unemployment among women also reflects a
high proportion looking for initial
jobs and re-entering the job market
after varying periods of non-market
activity. Frequent movement in and
out of the labor force, among women as a group, is in part related to
family obligations and decisions.
Thesefactors would suggesta fullemployment jobless rate of about
(continued on page 2)
D®]P)©l.rfttIlIDl®lTIl
tt
IF®cdl®If@ll
@{f
§@rrn
IF
Opinions expressed in this newsletter do not
necessarily reflect the views of the manage-rnent of the
Federal Reserve Bank of San Francisco, nor of the Board
of Governors of the Federal Reserve System.
4.9 percent, but in the Council's
view, still other factors would suggest an even higher rate. For example, an expanded unemploymentinsurance program tends to increase the duration of unemployment and to increase the supply of
labor generally. The expansion of
other welfare programs for the lowincome unemployed, as well as the
growing proportion of families with
two major earners, also may have
lessened the financial burden of
unemployment for many families.
These factors, the Council contends, "have tended to weaken the
tie between current consumption
and current earnings, and they may
have increased the extent of unemployment that is consistent with a
full-employment economy."
Unemployment-insurance benefit
payments, while providing income
maintenance for the unemployed,
also tend to increase the supply of
labor over time. The expanded UI
benefits tend to increase the number of people who want to enter or
remain in the labor force. Consequently, for any given level of
aggregate demand, the system generates a larger labor force and a
higher unemployment rate than
would otherwise exist. Some analysts argue the reverse, pointing to
the UI program's ability to boost
incomes and spending, and thereby
reduce unemployment, as an instrument of automatic stabilization.
However, a particular level of
aggregate demand may be approached through any number of
alternative routes. Direct Federal
spending programs, for example,
could add to final demand and
employment without inducing as
much of an increase in labor supply
as would occur under the UI program.
UI and labor supply
The availability of unemploymentinsurance benefit payments can affect the supply of labor because
individuals in general tend to respond to changes in their expected
wage incomes. At least three elements may enter into the calculation of expected income from em.ployment: potential wages, potential jobless benefits, and job-finding
costs. Ordinarily, an individual will
incur both psychic and pecuniary
costs in searching for a job, and
these costs may reduce the expect:ed net benefits from market activity
and thereby tend to reduce the
quantity of labor supplied. On the
other hand, the availability of UI
benefits may offset some of the
direct costs of job search, and in
this way, increase the net benefits
expected from job holding and thus
strengthen labor-force participation.
Labor-force participation also may
rise be,causeof the actions of some
individuals who (eport that they are
looking for work even when they
are interested only in receiving jobless benefits. The same result might
occur because of the actions of
those who search for seasonal or
temporary jobs, not because of the
direct pay involved, but rather because their job search makes them
eligible for UI benefits at frequent
intervals.
The unemployment-insurance tax
structure also may tend to raise the
2
Percent
UNEMPLOYMENTRATE
4
____
o
1960
FULL EMPLOYMENT RATE1966
1968
-
1970
1972
Sourea: Bureauof Labor Statistics: Council of EconomicAdvisora
labor-force and unemployment figures. Moststate laws create a rather
loose relationship between the
benefits received by an unemployed
worker and the tax payments
made by his employer-which,
incidentally, helps explain why the
program is not self-financing. Employer contributions to state
unemployment-compensation
funds increase in line with the
amount of benefits paid out to
former employees. Because of the
ceiling on employer contributions,
however, a firm that is paying the
maximum rate incurs no cost for
additional unemployment and incurs no gain from a small reduction
in unemployment. The tax structure, although designed to stimulate employer efforts to reduce
unemployment-the
"experience
rating" system-thus contains a
flaw which limits its effectiveness.
What FEUrate?
Demand management, through fiscal and/or monetary policies, attempts to achieve a level of aggregate demand consistent with the
full-employment jobless rate. Underestimates of this rate thus could
lead to unnecessary expansionary
policies which aggravate inflationary pressures. Of course, some increase in the FEU rate could be
consistent with the operations of an
efficient economy. For instance,
public policy would probably be illadvised to try to reduce the higher
unemployment rate associated with
higher school enrollment, because
the benefits of increased education
shou Id far more than offset the
costs associated with students' high
labor-turnover rates.
Our labor-supply model suggests
that since 1 973-the last year of
3
relatively full employmentexpanded unemploymentinsurance benefits have increased
the full-employment unemployment rate by 0.3 percentage points,
from 4.9 to 5.2 percent. (By the
calculations of the Council of Economic Advisers, other factors may
have raised the rate even further, to
about 5.5 percent.) Further liber.alization of UI benefits would push
the FEU rate up even more, since
our estimates are based upon an
unchanged (1976) level of benefits.
We should not assume, however,
that the level of joblessness asso.ciated with full employment will
continue to increase over time. A
reversal of recent trends in laborforce composition could bring
about a different movement in the
full-employment unemployment
rate. In particular, the rate could
actually decline in future years as
the popu lation ages and as the
young come to represent a smaller
proportion of the labor force.
Nevertheless, the full-employment
unemployment rate is also related
to the existing economic structure
and laws. The primary purpose of
the unemployment-insurance system remains income maintenance
for the unemployed. As a byprod-.
uct, the program appears to have
induced a greater supply of labor
from the population over time, and
to have increased the rate of unemployment consistent with a given
degree of price stability.
RoseMcElhattan
• 4Eln •
• EpEAaN• o4EPI
!!EMEH • E!UJOJ!IE:) • EUOZPV a E)jSEIV
·mte::>IO:lSputeJ::I
ueS
ZSl · ON
al Vei
1 S0el
·s·n
lRVW SSV1::>
.lsm:!
BANKING DATA-TWELfTH fEDERALRESERVE
DISTRICT
(Dollar amounts in millions)
Selected Assetsand Liabilities
Large Commercial Banks
Amount
Outstanding
8/3/77
99,243
76,541
1)868
23,672
24,729
13,290
8,865
13,837
97,783
27,677
484
67,629
5,415
31,926
28,310
10,735
Weekly Averages
of Daily Figures
Week ended
8/3/77
Member Bank Reserve Position
ExcessReserves(+)/Deficiency (-)
Borrowings
Net free(+)/Net borrowed (-)
Federal Funds-Seven Large Banks
Interbank Federal fund transactions
Net purchases (+)/Net sales (-)
Transactions with u.s.security dealers
Net loans (+)/Net borrowings (-)
+
+
+
7127/77
+
+
+
+
+
+
+
Loans (gross, adjusted) and investments*
Loans (gross, adjusted)-total
Security loans
Commercial and industrial
Real estate
Consumer instalment
U.S. Treasury securities
Other securities
Deposits (less cash items)-total*
Demand deposits (adjusted)
U.S. Government deposits
Time deposits-total*
Statesand political subdivisions
Savingsdeposits
Other time deposits:j:
Large negotiable CD's
Change from
year ago
Dollar
Percent
Change
from
+
+
+
+
+
501
397
78
14
103
82
118
14
485
104
134
250
217
66
531
398
+
+
+
+
+
+
-
+
+
+
-
+
-
+
+
-
Week ended
7127177
195
+
153
196
+
152
-
+
+
+
+
+
+
-
12.01
14.56
32.20
9.71
20.89
16.73
7.55
13.39
9.97
10.57
24.14
9.71
8.25
19.77
5.89
4.13
Comparable
year-ago period
10
8
18
99
15
84
+
+
+
+
+
+
10,639
9,729
455
2,095
4)273
1,905
724
1,634
8,869
2,646
154
5,983
487
5,271
1,575
463
+
+
47
4
43
88
+
151
*Includes items not shown separately. :j:lndividuals, partnerships and corporations.
Editorial comments may be addressed to the editor (William Burke) or to the author •.••
Information on this and other publications can be obtained by calling or writing the Public
Information Section, Federal Reserve Bank of San Francisco, P.O. Box 7702, San Francisco 94120.
Phone (415) 544-21184.
@FedFRASER