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FEDERAL RESERVE BANK OF RICHMOND

MONTHLY
REVIEW

The Cyclical B ehavior
of Consum er Credit
Behind the U nem ploym ent Rate




The

M

o n th ly

R

e v ie w

is produced by the Research

D epartm ent of the F ederal R eserv e Bank of Richmond.
Subscriptions are available to the public w ithout charge.
A ddress inquiries to Bank and Public Relations, F e d ­
eral R eserve Bank of R ichm ond, P . 0 . B o x 27622,
Richm ond, Virginia 23261. A rticles may be reproduced
if source is given. P lease provide the Bank's Research
D epartm ent with a copy of any publication in which an
article is used.

Digitized 2 FRASER
for


MONTHLY REVIEW, OCTOBER 1973

THE CYCLICAL BEHAVIOR OF
CONSUMER CREDIT
T he term consum er credit refers to short- and

reflect such things as secular incom e grow th, changes

intermediate-term credit, generally of no m ore than

in the size and com position of the population, and the

seven years maturity (the exception is mobile home

development of efficient financial institutions dealing
in consum er credit.
R ising incom e levels permit

cre d it), extended to households by financial and
retail establishments for the initial purchase of co n ­
sumer good s and services and for the refinancing of
existing debt originally obtained for that purpose.

greater debt repayment obligations to be incurred
without causing undue financial hardships.
P op u ­

M ost consum er borrow ing, approxim ately 80 per­

lation grow th tends to increase the demand fo r c o n ­
sumer goods, including durables that are frequently

cent, is in the form of installment credit that is

purchased on credit.

scheduled to be repaid in tw o or m ore installments.

lation

T he remainder is in the form of single payment loans

rising, as it currently is in the United States, the

such as charge account credit and service account
credit, which are payable in full upon billing.
F o r the individual consumer, such credit, particu­
larly installment credit, represents a convenient, sys­

in the family

If the proportion of the p op u ­
form ation

ages

of 25-35

is

demand for consum er good s and consum er credit is
further strengthened.
Finally, the development o f
efficient financial institutions is a necessary con d i­
tion for long-term credit grow th. O nly when such

tematic means of financing large consumer purchases

institutions can continue to supply the consum er with

out o f future income.

Since the resulting repayment

reasonably low -cost credit while providing a suitable

obligations can be considered in part a form of forced
saving from disposable income, desired purchases can

rate o f return to ultimate lenders is such grow th
possible on a sustained basis.

be made with substantially less attrition in accum u­

L on g-ru n credit grow th does not occur at a steady

lated household assets than w ould be possible without

rate, however. Cyclical fluctuations are characteristic
o f most facets o f econom ic activity, reflecting such

access to credit. Equally im portant is the likelihood
that without access to credit, many durable goods
purchases might be out of the reach o f households

diverse influences as fiscal and monetary policy ac­
tions, labor disputes, international econom ic develop­

unable to accumulate sufficient savings without the
self-discipline imposed by debt repayment obligations.

ments,

O f course, the availability of credit may also en­
courage some individuals to make purchases that

cycles can be observed in the behavior o f consum er

would be financially unsound in terms of their ability
to meet installment payment obligations. T he results
o f such indiscretions, while certainly o f a serious
nature for the individual involved, must be viewed as
one of the costs of credit availability and are p rob ­

and

business

and

consum er

expectations.

Consumer credit is no exception, and very definite
credit. T o illustrate, total consum er installment credit
has grow n at an annual rate of 9 percent over the
eight-year period from 1965 to 1973.

In contrast,

during the past tw o years, installment credit has
grow n at annual rates of 12.1 percent (June 1971 to

ably m inor in com parison with the overall benefits to

June 19 7 2 ), and 17.1 percent (June 1972 to June

society of a w ell-developed consumer credit market.

19 7 3 ), reflecting a substantial cyclical acceleration in

T he grow th of consum er credit over the past 25

the rate o f consum er credit grow th.

years has facilitated the development o f large-scale

T he tendency for these credit cycles to coincide

goods markets that allow relatively low -cost p ro ­

closely with cyclical business fluctuations has in the

duction of consum er durables, contributing in turn

past raised questions concerning the impact o f co n ­

to an im proved standard of living and greater e co ­

sumer credit behavior on overall econom ic stability;

nom ic welfare for the society as a whole.

specifically, does consum er credit grow th tend to

Determinants of Consumer Credit Behavior O v e r

accentuate expansionary pressures in latter phases of

the long run, the grow th in consumer credit tends to

the business cycle, or does consum er credit grow th




FEDERAL RESERVE BA N K OF R IC H M O N D

3

instead primarily reflect the overall demand pres­
sures ? T he answer to this important question re­
quires knowledge of causal relationships between
credit and the determinants of general business ac­
tivity.

A th ough there is much uncertainty still sur­

total volum e o f C IC outstanding, new extensions,
repayments, and net change in C IC (extensions less
repaym ents). T he stock of C IC is essentially the
total o f all past extensions minus the total of all past
repayments.

N ew extensions are the gross amount

rounding these relationships, cyclical acceleration in
consum er credit grow th has occasionally stimulated

of new credit made available each period and reflect

proposals for the im position o f controls on consum er

demand conditions in the credit market.

credit terms, such as m axim um maturities and m ini­

do not, however, reflect the impact o f consum er

mum dow n payments.

credit on consum er spending, since repayments entail

presumably based

on

Proposals o f this type are
some concept

of consum er

the direct response of C IC to changing supply and
Extensions

a reduction in curent disposable incom e that con sti­

credit grow th as a cyclically destabilizing econom ic

tutes an offset to the amount of consum er spending

phenom enon.

generated by gross new extensions. T he net change
in C IC , obtained by subtracting repayments from

A ccordin gly, the remainder o f this

article is devoted prim arily to a review of consum er
credit behavior since 1965, keeping in mind the
the feasibility o f consum er credit controls.

new extensions, incorporates this offset and is a m ore
suitable measure than gross extensions of the general
impact of C IC on consum er spending. T he remain­

Several measures of consumer credit behavior are
examined, as is the relationship between consum er

ing C IC measure, repayments, is closely related to
the amount of C IC outstanding and reflects mainly

installment credit ( C I C ) growth and the general
business cycle.
Attention is also focused on the

past grow th in consum er credit.

cyclical relationships am ong the important com p o­
nents of C IC grow th during the period under discus­

run trend that dominates the total stock of C IC out­
standing.

sion.

T he discussion focuses entirely on installment

and to isolate the cyclical patterns o f interest, it is

credit, since it is the m ajor form of consum er credit

helpful to express the other three C IC measures—

bearing that some of the observations might have on

Chart 1 indicates clearly the strong upward longIn order to minimize this trend influence

and also because it is the primary source o f cyclical

extensions, repayments, and net change— as percent­

fluctuations in consum er credit growth.

ages of the previous quarter’ s stock of C IC .

This

adjustm ent in addition converts the net change mea­
Cyclical Behavior of Consumer Credit T h e re are
four basic types o f inform ation available on C IC :


4


sure into the percentage grow th rate of C I C ; the
cyclical behavior of such grow th rates are com m only
referred to as grow th cycles.
A ll three adjusted
measures are shown in Chart 2.
A s mentioned earlier, repayments are influenced
prim arily by the stock of C IC , which is strongly
trend-dominated. E xcept for a m inor increase in the
proportion of C IC repaid each quarter, which is
equivalent to a slight reduction in the average m a­
turity o f outstanding C IC , Chart 2 ( a ) indicates that
there has been little systematic movement in the
proportion since 1965.

O n the other hand, if the

cycle is defined for sake of reference as running from
peak to peak, there have been tw o definite credit
cycles in extensions and net C IC change since 1965,
as shown in Charts 2 ( b ) and 2 ( c ) . Because these
tw o cycles, m oreover, display almost identical timing
patterns, the follow ing discussion will focus only on
the net change in C IC (w hich represents the C IC
grow th rate.
Consum er Credit and the Business C ycle

A s was

previously mentioned, there have been tw o obvious
C IC grow th cycles since 1965.

T he first lasted

approxim ately from 1965 through 1968.

D uring this

initial cycle, the peak in C IC grow th occurred in
M ONTHLY REVIEW, OCTOBER 1973

the second quarter of 1965, after which C IC grew

1965 and continued until the beginning o f 1967. T he

at a steadily declining rate until the second quarter

slow dow n reflects to some extent actions o f the F ed ­

of 1967. T he subsequent acceleration in C IC grow th

eral R eserve System, which by 1966 was tightening

continued until the beginning o f the second credit

monetary policy in response to the inflationary pres­

cycle in 1969.

sures being generated during the vigorous econom ic

There was no official business recession during the

expansion of the m id-1960’s. C IC grow th decelerated

first credit cycle. Nevertheless, the behavior of G N P

steadily until early

over this period indicates that a definite slow ing in

picked up, monetary policy eased, and C IC growth

the overall pace of econom ic activity began late in

began to accelerate.




FEDERAL RESERVE BA N K OF RIC H M O N D

1967, when

business

activity

5

The econom ic slow dow n of 1966, how ever, had
little apparent impact on mounting inflationary forces,
which were further stimulated by the resurgence of
business activity in 1967.
B y 1969, the Federal
R eserve

System was again acting to restrict the

availability of credit in order to further moderate
the pace of econom ic expansion that had begun to
slow in 1968. Late in 1969, business activity peaked.
In the third quarter o f 1969, C IC grow th turned
down, com m encing the second cycle, and continued
to decelerate until m id -1970. Both the econom ic pace
and C IC grow th also began to accelerate. T he ac­
celeration phase of the second C IC grow th cycle
proceeded steadily until the second quarter o f this
year. W hether the recent slow dow n is a tem porary
phenom enon or is related to the second quarter slow ­
dow n in econom ic activity remains to be seen.
A close timing relationship can thus be observed
between the business cycle and the cycles in trendadjusted C IC net change and extensions.

Both C IC

measures led the tw o cyclical peaks in business ac­
tivity (n ot counting the possibility that the 1973
slow dow n marks the beginning of another credit
c y cle ), and their troughs roughly coincided with those
in the business cycle.

T he tendency for these mea­

sures to lead the business cycle peaks can be explained
on technical grounds : subtracting a lagging indicator
(repaym ents) from a coincident indicator (e x te n ­
sion s), or dividing a coincident indicator by a lagging
indicator, yields a leading indicator. T o the extent

the timing relationships between business and credit
cycles.

Even if these lead relationships can be at­

tributed to the technical relationships between lead­
ing, lagging, and coincident indicators, it still appears
that whatever cyclical econom ic forces ultimately af­
fect business and consum er credit, the tw o cycles
m ove too closely together for either one or the other
to be labeled m ore the “ cause” and the other m ore the
“ response.”
Cyclical B ehavior o f C IC C om ponents

In this

section, total C IC is broken dow n into its m ajor
use and source com ponents, and the individual grow th
cycles for these com ponents are examined.
T he
m ajor uses of C IC a re: autom obile loan s; other
consum er good s loans, generally used to finance n on ­
autom otive consum er g o o d s ; personal loans,

fre ­

quently obtained for purposes such as debt con soli­
dation, tax payments, medical, educational, and travel
ex p en ses; and hom e repair and m odernization loans.
T he m ajor suppliers, or sources, o f C IC are com m er­
cial banks, finance companies, other financial lenders
(m ainly credit unions, which provide about 85 p er­
cent of all lending in this ca te g o ry ), and retail outlets
(including autom obile d ealers).
T he cyclical behavior of the m ajor C IC use co m ­
ponents is illustrated in Chart 3.

W ith the e x cep ­

tion of the home repair and m odernization category
(w hich represents only about 5 percent o f all C IC
outstanding), the use com ponents display grow th

that repayments are closely related to C IC outstand­

rate cycles that con form very closely to the timing

ing, rapid C IC grow th eventually imparts a m oder­
ating influence on subsequent C IC grow th indepen­
dently of any corresponding slow dow n in new exten­
sions. A t some point, the cumulative effects of rapid
C IC grow th on C IC outstanding begins to have an

o f the overall credit cycle and by implication to that
o f the business cycle as well. A t least fo r the time
period in question, it does not appear that any par­

upward impact on repayments, which in turn have a
dampening effect on the net spending impact o f new

or m ore slow ly than any other to changes in overall
C IC grow th.

extensions.

ticular type of loan, and by inference any particular
form of consum er spending, might react m ore quickly

Thus a net C IC change slow dow n can

A lthough there was a substantial decline in credit

occur prior to the impact of a slow dow n in overall

grow th at retail outlets in 1968 that somewhat o b ­

It is also p o s­

scures its first cycle, the same similarity in tim ing is

sible that the lead relationship reflects the tendency

evident am ong the m ajor C IC source com ponents,

for credit markets to respond more rapidly to under­

whose

lying cyclical econom ic factors than the markets for

Based on the experience of the past tw o credit cycles,

goods and services.

it does not appear that changes in C IC grow th o rig i­

business activity and C IC extensions.

cyclical

patterns

are

shown

in

Chart

4.

A ll in all, C IC behavior over the past eight years

nate in any particular class o f lenders and proceed in

offers little insight into the cause-effect relationships

turn to other types of financial institutions over the

that might exist between the pace of business activity

cycle.

T he tendency

T he close conform ity o f the cyclical timing am ong

for C IC grow th to lead the cyclical peak and to co in ­

and the grow th of consum er credit.

the various C IC com ponents suggests that the various

cide with the cyclical trough seems to suggest that if

econom ic forces affecting the uses and sources of

consum er credit does inject a destabilizing influence

consum er credit are closely interrelated over time.

into business activity, that influence is not evident in

Because they m ove so closely together over time,

Digitized 6 FRASER
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M ONTHLY REVIEW, OCTOBER 1973




FEDERAL RESERVE BA N K OF RIC H M O N D

7

C hart 4

GROWTH RATES OF CIC SOURCE COMPONENTS
(Seasonally Adjusted)
A nnual Percentage Rate

A nnual Percentage Rate

A nnual Percentage Rate
25.0
OTHER F IN A N C IA L

LENDERS

20.0
15.0
10.0
5.0

o*h
A nnual Percentage Rate

Source:

Federal Reserve Bulletin, various issues.

Digitized 8 FRASER
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M ONTHLY REVIEW, AUG UST 1973

m oreover, it is not possible to differentiate between
com ponents that lead and com ponents that lag the
business cycle.
If such dispersed cycles could be
observed, it would perhaps be possible to infer m ore
about the causal relationships between credit and
business cycles. T he preceding observations instead
serve to point out again the close interrelationships

Chart 5

DOMESTIC AUTO SALES
.....
Millions

(Seasonally Adjusted)

am ong the econom ic factors affecting credit behavior
and those affecting overall business activity.
A u tom obile Installm ent Credit

A utom obile credit

is the largest of the m ajor C IC use categories, and
automobiles account for m ore consumer credit by far
than any other single consum er item. A u to credit is
also the only m ajor C IC use devoted to a single type
of consumer g ood . Thus it is the only use com ponent
whose cyclical behavior can be com pared to the be­
havior of a corresponding series that might reflect
the nature of the relationship between credit and
spending.

Chart 5 illustrates the behavior o f auto

sales over the 1965-1973 period.

A u to sales began

to decline m oderately in early 1966 at approxim ately
the same time that overall business activity was slow ­
ing and well after the slow dow n in auto credit
grow th that began in early 1965.

1965
Note:
Source:

1967

1969
Quarterly

1971

1973

Q uarterly figures are expressed in annual rates.
U. S. Department o f Commerce, Business C on­
ditions Digest, various issues.

A lthough auto

credit subsequently grew at a slow ly rising rate
throughout 1967, sales continued to decline until the
beginning of 1968.

F ollow in g a brief upsurge in

sales, both sales and auto credit grow th turned dow n
and continued to decline until the third quarter o f
1970.
Overall econom ic activity appeared to be
recovering in the third quarter of 1970, but the in­
cipient recovery was interrupted by the auto strike
o f 1970, as was a brief turnaround in auto sales and
credit grow th.
Since the post-strike econom ic re­
covery in 1971, a definite upward trend in auto sales
has been accom panied by an acceleration in auto
credit grow th that proceeded steadily until the second
quarter o f this year.
N o clear lead-lag relationship emerged between
the auto sales and auto credit cycles. D uring the first
cycle, auto credit tended to lead auto sales, and a

grow th cycle.

T his article has pointed out that these

C IC cycles corresponded very closely to cyclical flu c­
tuations in the overall level o f business activity.

At

least for the period from 1965 to 1973, how ever, it
is difficult to infer the presence o f any cause-effect
relationship running prim arily from consum er credit
to general econom ic activity, or vice versa.

Neither

does the cyclical behavior of the various C IC co m ­
ponents, including the im portant auto credit category,
give any indication o f what the prim ary causal rela­
tionship might be.
Thus, the evidence of the past eight and one-half
years, though far from exhaustive or conclusive, sug­
gests that the factors affecting the grow th o f C IC
and those affecting overall econom ic activity are
closely interrelated over time. A dm ittedly, the timing

similar situation may have developed in the second

relationships observed do not constitute a sufficient

quarter of this year.

basis for denying the potentially destabilizing nature

In the second cycle, credit

lagged sales at the peak and they coincided at the

of cyclical C IC grow th.

1970 auto strike trough.

A lthough there has been

are significant econom ic and social costs involved in

an observed tendency in the past for auto sales to lead

the im position o f selective controls on consum er in­

the general level o f business activity, this relationship

stallment credit.

has not been observed in m ore recent experience.

anticipated benefits of consum er credit controls, it

C o n clu sio n S in ce 1965, th ere h ave been tw o w e lldefined cycles in the grow th of C IC , and the C IC
slow dow n in the second quarter o f 1973 may signal

In weighing these costs against the

would be prudent to keep in mind the uncertainty
surrounding the causal relationships between credit
and general business cycles.

the beginning o f the dow n phase of another C IC



O n the other hand, there

FEDERAL RESERVE B A N K OF R IC H M O N D

Glenn P icou
9

BEHIND THE UNEMPLOYMENT RATE
D e s p ite the a cce le ra tin g p ace o f the e co n o m y
during the past year, unemployment continues to be a
significant problem . T here were 4.1 million unem­

portance attached to employm ent and unemployment
statistics, the C P S , it should be noted, is the largest

ployed persons in 1970, up 1.2 million from the
previous year.
Unem ploym ent fluctuated around

strict tests of statistical reliability.

monthly household survey in the w orld and meets

5 million during 1971 and declined slightly in 1972.

Interviews o f the sample households are conducted
during the calendar week containing the nineteenth

T he annual average unemployment rate increased

day o f each month, and the data collected relate to

from 3.5 percent in 1969 to 4.9 percent in 1970; the

the status o f individuals in the week including the

rate hovered close to 6 percent in 1971 and then

twelfth day of the month.

dropped in 1972 to 5.6 percent o f the civilian labor
force. Because unemployment statistics are im por­

that the survey should cover a broader time span
because use of a single survey week could cause

tant in providin g a general indication o f the state of

erratic results if there were unusual occurrences, such

the nation’s econom y, many questions have been

as labor strikes and bad weather, during that par­

raised during the current period of high unem ploy­

ticular calendar week.

ment about how the Federal Government measures

Som e observers believe

Personal visits by the inter­

source of inform ation, but they should be used care­

viewers are required in the first, second, and fifth
months that a household is in the sample. In the
other months, the interview may be conducted by

fully to avoid misinterpretation. T his article will re­

telephone if the respondent has no objection to this

view the concept o f unemployment and the p roce­
dures for collecting unemployment statistics so that
proper evaluation can be given to employm ent c o n ­

procedure. F our to six percent o f the occupied units
eligible for interview are not interviewed in a given

ditions.

unavailable fo r other reasons.

unemployment. U nem ploym ent figures provide a rich

month because individuals were not at hom e or were
U nder the present

rotation system sample households are interviewed

MEASUREMENT AND CONCEPTS
Statistics on em ploym ent and unemployment are
derived from a monthly sample survey known as the
Current Population Survey ( C P S ) . T he name re­
flects the use of this survey as a source for a wide

for four consecutive months, then leave the sample
for eight months, and finally return fo r the same
period of four months the follow in g year. A p p r o x i­
mately 6,000 new households are added each month.
T his system provides a year-to-year overlap in the
sample and im proves the continuity o f the statistics

variety of dem ographic and econom ic characteristics
of the population. T he C P S , which dates back to
1940, is conducted by the Bureau of the Census for

over time.

the Bureau of L abor Statistics of the Department of

gories on the basis o f their status during the survey

L abor.

It is a scientifically selected stratified sample

week. Persons under 16 years of age and the institu­

that covers 461 sample areas consisting of 923 cou n ­

tional population, which consists o f inmates o f penal

ties and independent cities.

and mental institutions, tuberculosis sanitariums, and

Som e area in every state

and the District of Columbia is covered.

T his strati­

fication allows the survey to include urban and rural
areas of both high and low econom ic levels, industrial
and farm ing areas, and m ajor geographic divisions
of the country in the same proportion as they exist
in the entire nation.

Each month 55,000 households

T he

CPS

classifies the civilian noninstitutional

population age 16 and over into three broad cate­

homes for aged, infirm, and needy, are excluded from
the survey.

Persons in the civilian noninstitutional

population are classified either as em ployed, unem­
ployed, or not in the labor force.

A s defined by the

Department o f Labor, the civilian labor force co m ­

are selected for the sam ple; 47,000 o f these house­

prises the total of all civilians classified as employed

holds, containing around 105,000 persons age 16 and

or u n em p loyed ; the total labor force also includes

over, are eligible for interview. Although the sample

members of the A rm ed

size might appear to be small, considering the im ­

United States or abroad.


10


M ONTHLY REVIEW, OCTOBER 1973

F orces

stationed

in the

Employed Persons E m p lo y e d p erson s are th ose
who engaged in any w ork for pay or profit during
the survey week, as well as persons who w orked with­
out pay for at least 15 hours in a fam ily-operated
enterprise. A lso included as em ployed persons are
all individuals tem porarily away from their regular
jobs for various reasons such as vacation, illness, or
labor-management disputes. T he C P S is, m oreover,

kept out of the labor force because they suffer a
physical or mental disability that makes them unable
to participate in normal labor force activities. T hose
persons outside the labor force are asked such addi­
tional questions as : ( 1 ) what their principal activity
was during the survey w e e k ; ( 2 ) when they last
w orked and the reasons for leaving that j o b ; ( 3 )
whether they want to w ork at the present time and,

used to collect from em ployed persons such in for­

if so, the reason they are not seeking w ork cu rren tly ;

mation a s : ( 1 )

and ( 4 ) their intentions to seek w ork in the next
12 months.

hours w orked during the survey

w eek ; ( 2 ) whether they usually w ork 35 hours or
more at their jo b ; ( 3 ) a description o f their current
jo b ; ( 4 ) the reason the interviewee is not w orking
during the survey week if he was tem porarily away
from w ork, and whether he was paid fo r this time
o ff; and ( 5 ) if the interviewee is w orking part time,
the reason for doing so.
Unemployed Persons

Other Survey Concepts E a ch p erson is cla ssified
according to the activities reported during the survey
week. The total numbers are “ weighted up” or ad­
justed to equal the population age 16 and over. T he
weights for all households interviewed are adjusted
to account for the households not interviewed that

T o b e co u n te d as u n e m ­

ployed, persons must not have a job at the present

month.

Then the weighting takes into considera­

tion the age, sex, color, and urban-rural distribution

time and must be currently available fo r w ork.

of the population so that these characteristics are re­

Persons not w orking must also have engaged in some

flected

type of iobseeking activity within the past four weeks
to be classified as unemployed. Specific jobseeking

estimates.

activities consist of registering at employm ent offices,
meeting prospective employers, checking with friends,

one activity during the survey week.

placing or answering advertisements, writing letters
of application, or being on a union or professional

in

the

proper

proportions

in

the

final

M any individuals may have engaged in m ore than
Therefore, a

system of priorities is used so that persons are classi­
fied in only one group. F o r example, if a person has
a jo b and at the same time is looking for another

register. Som e persons may be out of w ork but not
actively looking for w ork because they have been laid

position, he is counted as employed.

A t the end o f

the interview, persons interviewed may not know how

off or are waiting to start a newly acquired job . The

they will be classified.

definition of unem ployed persons now includes those

the w ord “ unem ployed” during the interview, and

workers waiting to start a new jo b within 30 days
and those waiting to be called back to a jo b from

the person interviewed is never asked if he has ap­

which they have been laid off.

payments.

Supplemental in for­

mation on persons classified as unem ployed in clu d es:
( 1 ) what the individual did during the last four
weeks to obtain w ork and the length o f time spent
looking for w o r k ; ( 2 ) whether the individual is
seeking full- or part-time w o r k ; ( 3 ) when the person
last w orked at a full-tim e jo b lasting tw o consecu­
tive weeks or m ore; and ( 4 ) a description o f the

plied for or is receiving unemployment compensation
A lthough there is no direct connection

between the official unemployment figures and the
number o f persons receiving unem ployment com pen­
sation, the Department o f L abor does prepare unem­
ployment insurance data.

T he definition o f unem­

ployment used in the household survey is not co m ­
parable to the eligibility requirements for unem ploy­
ment compensation.

person’s last full-time civilian job .

T he interviewer never uses

F o r example, persons with a

jo b but not at w ork and persons w orking part time
Not in the Labor Force
in the labor force”

T h e cla ss ifica tio n “ n ot

might qualify for unemployment com pensation but

includes all civilians w ho are

are classified as em ployed rather than unem ployed in

neither em ployed nor unemployed.

A lso classified

the C P S .

as not in the labor force are those persons engaged

T he employm ent and unemployment concepts o f

in housework in their own home, those in school,

the Current Population Survey have remained sub­

those too old to w ork, retired persons, and the v o l­

stantially unchanged

untarily idle.

Seasonal w orkers who were not re­

there have been some improvem ents in the sample

ported as unem ployed during the survey week and

selection and the processing and estimation o f the

since

its inception,

although

persons w ho did less than 15 hours of unpaid family

data.

w ork are in this category too.

ceptual revisions, which changed the w ording o f ce r­




Som e persons are

In 1967, for example, there were some co n ­

FEDERAL RESERVE BA N K OF RIC H M O N D

11

tain questions on the survey. A shift was made from
an unspecified jobseeking period to a four-w eek peri­
od. T he requirement that a person must cite a spe­
cific jobseeking activity to be counted as unem ployed
was also introduced. T he interviewee is also now
asked if he is immediately available for w ork rather
than if he will be available at some future period.
T his availability test w ould exclude from the unem ­
ployed category such people as school-age persons
w ho may be seeking summer jobs but are not avail­
able at the time. In 1967, the age limit fo r official
statistics on employment, unemployment, and other
labor force concepts was also raised from 14 to 16
years of age. H istorical data were revised to provide

If discouraged w orkers were classified as unem ployed
for the years 1970-72, the overall unem ployment rate
w ould be about one percentage point higher.

THE ANATO M Y OF UNEMPLOYMENT
T he unemployment rate is defined as the percent­
age of total unem ployed in the civilian labor force.
A s shown on Chart 1, unemployment rates clearly
reflect business cycles. Since the unemployment rate
represents an overall average of unem ployed, it co n ­
ceals significant differences am ong identifiable groups.
F or example, it measures not only the number of

Discouraged W orkers T h e in clu sion o f the a b o v e

persons who have lost job s but also those w ho have
quit their job s to seek other jobs, new w orkers look ­
ing for their first job , and experienced w orkers re­
entering the labor force. In addition to abstracting

concepts in the definition of unemployment excludes

the reasons for unem ployment (an d thus the hard­

consistency with current information.

from the unemployment count those persons known

ship associated with it ), the overall average also fails

as “ discouraged w orkers.”

to reveal important differences am ong the various

Such w orkers are people

w ho would have been looking for w ork had they not

sectors of the population.

believed they were unemployable. Even though these

ample, reveal a wide divergence in the unemployment

so-called discouraged workers are not counted as

rates am ong different groups.

unemployed, this group has been identified in the

unemployment rates for teenagers than fo r adult men

Current Population Survey since 1967.

and wom en and higher rates for N egroes and other

Generally,

Charts 2 and 3, for e x ­
T hey show higher

the number of discouraged w orkers increases during

races than for whites.

periods of high unemployment and decreases at other

ment rate for wom en is usually higher than for men.

times.

In addition, the unem ploy­

T his pattern was follow ed in the 1970-71

Changes in the overall unemployment rate are also

period of rising unemployment. The total number of

associated with important differences in the number

discouraged w orkers increased 21 percent from 1970

o f people w ho are unem ployed, the duration of their

to 1971 and remained essentially unchanged in 1972.

unemployment, and the reasons for their unem ploy-


12


M ONTHLY REVIEW, OCTOBER 1973




FEDERAL RESERVE BA N K OF R IC H M O N D

13

ment. T he follow in g sections describe these facets
of unemployment.
Generally, however, periods of

Number of Unemployed W h e n the u n e m p lo y ­
ment rate rises, the rise is usually coupled with an

rising unem ployment rates or percentages are char­
acterized by a greater number o f unem ployed persons,

increase in the average number o f unem ployed per­

a longer duration of unemployment, and a greater
proportion o f jo b losers am ong the unemployed.


14


sons and the average duration o f the unemployment
period.
W h en the jobless rate rose from 3.5 percent in

M ONTHLY REVIEW, OCTOBER 1973

1969 to 4.9 percent in 1970, the average number of
unemployed persons increased from 2.8 million to
4.1 million.

O n the other hand, a drop in the unem­

ploym ent rate does not necessarily mean a decrease
in total unemployment. Between 1961 and 1972 the
average number of unem ployed increased, but the
unemployment rate dropped from 6.7 percent to 5.6

losers” are persons on layoff and persons whose em ­
ployment ended involuntarily w ho immediately began
looking for w o rk ; ( 2 ) “ jo b leavers” are persons who
quit or otherwise terminated their em ploym ent volu n ­
tarily and immediately began looking for w o r k ; (3 )
“ reentrants” are persons w ho previously worked at a
full-time jo b lasting tw o weeks or longer but w ho

percent during that time because of grow th in the

were out of the labor force prior to beginning to look

labor force.

for w o rk : and ( 4 ) “ new entrants” are persons who

(S e e Chart 4 .)

A close parallel exists between the unemployment
rate and the duration o f the unemployment period.

never w orked at a full-tim e jo b lasting tw o weeks or
longer.

W hen the

From the data presented in Table I, it can be seen

unemployment rate rose from 3.5 to 5.6 percent b e ­
tween 1969 and 1972, for example, the average length

that when unemployment rises, the number o f jo b

of unemployment stretched from 7.9 to 12.0 weeks.

creases dramatically, and the period of unemployment

Chart 5 illustrates this general pattern.

losers as a proportion o f the total unem ployed in­
lengthens.

Job

losers

generally

are

unemployed

Unemployment by Length and Reason
The
Bureau of L abor Statistics defines the duration oi
unem ployment as the length of time (through the

Table I

current survey w eek) during which persons classi­
fied as unem ployed had been continuously looking for

UNEMPLOYMENT BY LENGTH AND REASON

w ork. A period of two weeks or more during which

1968-1972
Total
Unemployed

a person was em ployed or ceased looking for w ork is
considered to break the continuity of the present
period of seeking w ork.

(thousands)

The duration of unem ploy­

ment is one measure of hardship that indicates the
relative degree of seriousness o f the unemployment
problem. T he Bureau of L abor Statistics groups the
data on the length of unem ployment into three cate­
g o r ie s : ( 1 ) less than 5 w eek s; ( 2 ) 5-14 w eeks; and
( 3 ) 15 weeks and over.

5-14 weeks

15 weeks
and over

(Percent Distribution of
A nnual Averages)

Total Unemployed
1968

2,817

56.6

1969

2,831

28.8
29.2

13.2

1970

4,088

57.5
52.3

31.5

16.1

1971

4,993

44.7

31.6

23.7

1972

4,840

45.9

30.1

23.9

14.6

Lost Last Job

B y analyzing the statistics, one can see how the
duration of unemployment changes during high and
low levels of unemployment. Table I gives a distri­
bution of unem ployed w orkers by length o f and rea­
son for unemployment.
D uring periods o f rising
unemployment, such as in 1970 and 1971, the size
o f the group experiencing over 15 weeks of unem­
ployment increased as a proportion of the total unem­
ployed. A ccordin gly, the proportion experiencing less
than 5 weeks of unemployment constituted a smaller
share of the total unemployed. In 1971 the group
with less than 5 weeks of unemployment dropped
approxim ately 8 percentage points, whereas the cate­
gory with unemployment of 15 weeks or more in­
creased about 8 percentage points. The proportion of
the unem ployed in the 5-14 weeks category changed
onlv slightly in the years 1968-1972.

Less than
5 weeks

1,070

49.4

31.4

19.2

1,017

1968
1969

50.6

31.8

1970

1,809

44.6

34.7

17.6
20.7

1971

2,313
2,089

36.3
36.9

32.7

31.0

30.8

32.3

431

59.6

436
549
587

60.6

26.0
27.8

14.4
11.7

57.3
46.3
50.6

28.5
32.5
29.9

14.3
21.2

1972
Left Last Job
1968
1969
1970
1971
1972

635

19.5

Reentered Labo r Force
1968
1969

909

61.9
62.3

27.4
26.4

10.7

965

1970

1,227

59.4

28.6

12.0

1971

1,466

54.2

1972

1,444

53.9

29.5
28.9

17.1

11.6

11.3
16.3

Never W orked Before

In low unem­

1968

407

60.7

27.8

ployment periods the group with less than 5 weeks

1969

413

60.3

30.8

8.9

o f unemployment made up a much greater share of

1970

57.1

30.4

12.5

1971

503
627

52.2

31.6

16.3

1972

672

52.5

30.8

16.7

the unemployed than did the group with 15 weeks
or m ore of unemployment.
U nem ployed persons are divided into four m ajor
groups based on reason for unem ploym ent: ( 1 ) “ jo b



Note:
Source:

Percent;> may not total 100 due to rounding.
U. S. Department of Labor.

FEDERAL RESERVE BANK OF R ICH M O N D

15

longer than jo b leavers, new entrants, and reentrants.

Unemployment by Sex, A ge, and Reason

W h en total unemployment increased by ap p rox i­

II shows the distribution of unem ployed persons by

T a b le

mately tw o million from 1969 to 1972, the number of

age, sex, and reason for unemployment.

jo b losers accounted for about one-half of the in­

indicates that persons w h o lost their last jo b co n ­

crease. T he percentage of jo b losers w ho were unem­

stituted the largest proportion o f the average number

ployed 15 weeks and over increased from 17.6 per­

unemployed.

cent to 32.3 percent during the same period.

up the next largest proportion.

UNEMPLOYED PERSONS BY SEX AND AGE AND
REASON FOR UNEMPLOYMENT
1968

Reentrants into the labor force made
T hose w h o left their

last jo b voluntarily and new entrants each made up
less than 16 percent o f the average number unem­
ployed.

Table II

1967

T his table

1969

1970

1971

1972

(Percent Distribution of Annual Averages)
Total
Lost last job

40.9

38.0

35.9

44.3

46.3

43.1

Left last job

14.6

15.3

15.4

13.4

13.1

Reentrant
N ew entrant

31.4

34.1

13.1

32.3
14.4

14.6

30.0
12.3

11.8
29.4
12.6

29.8
13.9

,ales, 20 years and over

T he com position of unemployment by reason varies
am ong different age and sex groups.

T he main

reason for unemployment in the adult male category
was a loss o f jo b follow ed by a reentrance into the
labor force. In the adult female group, the tw o prin­
cipal reasons for unem ployment were a loss o f jo b
and reentrance into the labor force.
T he loss of
job s am ong the adult wom en group, how ever, was
not as important as it was for adult men. Reentrants
and new entrants accounted for the greatest p rop or­

Lost last job

63.9

60.4

57.8

65.1

66.3

62.6

Left last job

15.5

16.8

17.0

12.8

11.4

12.7

tion of unemployment in the 16-19 year group.

Reentrant

18.3

20.7

22.4

19.4

19.6

21.6

all the age and sex groups in Table II, the proportion

2.3

2.2

2.8

2.7

2.7

3.1

o f jo b losers am ong the unem ployed increased during

34.7

33.0

40.4

42.2

39.4

New entrant

periods of rising unemployment (1 9 6 9 -1 9 7 1 ).

smales, 20 years and over
Lost last job

36.8

Left last job

16.4

17.0

16.8

15.9

14.2

16.2

Reentrant

41.8

42.9

44.8

39.4

39.3

39.4

5.0

5.6

5.5

4.3

4.3

4.9

New entrant

F or

oth sexes, 16 to 19 years

CONCLUSION
T he unemployment rate and related statistics are a
basic consideration in policym aking, but they must

Lost last job

17.5

15.5

14.8

11.6

11.9

18.5
9.2

be given m ore than a mere superficial analysis to

11.0

18.1
11.4

18.9

Left last job

9.9

Reentrant

34.6

33.5

34.5

34.3

32.5

30.2

avoid m isconceptions about their meaning. A lthough

New entrant

36.9

39.4

38.8

36.2

39.8

41.0

Note:
Source:

Percents may not total 100 due to rounding.

unemployment statistics have certain shortcom ings,
they continue to provide one of the best measures of
the econom ic condition of the nation.
Sharon M . H aley

U. S. Department of Labor.


16


MONTHLY REVIEW, OCTOBER 1973


Federal Reserve Bank of St. Louis, One Federal Reserve Bank Plaza, St. Louis, MO 63102