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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 for FRASER 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 : Digitized for 4 FRASER 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 6for FRASER 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 8for FRASER 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. Digitized for 10FRASER 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- Digitized for 12 FRASER 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. Digitized for 14FRASER 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 1968 1969 1,070 49.4 31.4 19.2 1,017 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
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