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Volume 17
Issue 1
Spring 2012

A N E C O N O M I C E D U C AT I O N N E W S L E T T E R F R O M T H E F E D E R A L R E S E R V E B A N K O F S T. L O U I S

Many Moving Parts:

A Look Inside the U.S. Labor Market
BY DAVID ANDOLFATTO AND MARCELA M. WILLIAMS

Almost 8 million jobs were lost in the Great Recession of 2007-09 when the
average unemployment rate peaked at over 9 percent. Roughly 1 million jobs have been regained since early 2010, but the unemployment rate
remains persistently high. Some policymakers fear a prolonged “jobless
recovery”—a period of rising average income, measured by gross domestic
product (GDP)—with little or no employment growth.

What’s Your
Question?
Unemployment

Economic
Snapshot
Duration of
Unemployment

Bulletin Board
AP Economics
Conference

Resources
Econ Ed Live!
www.stlouisfed.org/education_resources

What, if anything, monetary and fiscal
policymakers can or should do to stimulate
the labor market is widely debated. Disagreements stem, in part, from the complicated
nature of the problem: The labor market has
many moving parts, policies may have unintended consequences, and ups and downs in
the labor market can be difficult to interpret.
Contrary to common belief, unemployment is not technically a measure
of joblessness. It is, instead, a measure of
job-search activity among the jobless. Millions of unemployed people find jobs every
month, even in a deep recession. Millions
of workers either lose or leave their jobs
every month, even in a robust expansion.
This flow of workers into and out of employment suggests that the labor market plays
an important role in reallocating human
resources to their most productive uses
through good times and bad. Furthermore,
unemployment rates, like most measures
of labor market activity, often vary significantly across economic and demographic
characteristics, such as income, age, sex, and
education.

In the labor market, the job-search activity
of unemployed workers coincides with the
recruiting efforts of firms with job openings.
The combination of jobs seekers and open
jobs suggests the presence of “frictions” in
the process of matching workers to jobs.
Vacancy rates (job openings) and unemployment rates tend to move in opposite
directions over the business cycle. Normally,
good times induce firms to create job openings, making it easier for unemployed workers
to find jobs. However, this is not always the
case. Since the end of the Great Recession, for
example, job openings in the United States
appear to have increased, yet unemployment
is still high. Some economists interpret this as
evidence of a “structural” change that will take
years to work through.
In everyday language, a “job” or “employment” is commonly associated with an
activity that generates a monetary reward.
Standard labor force surveys classify a
person as employed in a given month if
the person reports having performed any
continued on Page 2

T H E F E D E R A L R E S E R V E B A N K O F S T. L O U I S : C E N T R A L T O A M E R I C A’ S E C O N O M Y ®

Many Moving Parts
continued from Page 1

paid work in the previous four weeks. The term
“paid” refers to direct monetary compensation by
another party (an employer or, in the case of the selfemployed, a customer).
FIGURE 1

U.S. Employment-to-Population Ratio (1948:Q1–2010:Q4)
90
Males
80

Total

40
30
20
10
0

2008

2004

2000

1996

1992

1988

1984

1980

1976

1972

1968

1964

1960

1956

1952

Females

1948

Percent

70
60
50

Employment is divided by the civilian noninstitutional population 16 years of age and older.
SOURCE: Bureau of Labor Statistics/Haver Analytics.

FIGURE 2
Evolution of Sectoral Employment
(U.S. Employment-to-Population Ratio, 2000:Q1–2010:Q4)
120

100
90
80

2008

2004

2000

SOURCE: Bureau of Labor Statistics/Haver Analytics.

1996

Education, Health Services
Trade, Transportation, Utilities
Leisure, Hospitality Services
Government

1988

1984

1980

1968

50

1976

Construction, Mining, Logging
Manufacturing
Information, Financial, Other Services
Professional, Business Services

60

1992

70

1972

Index, 2000:Q1=100

110

Understanding how employment is defined and
measured is important for interpreting its level. An
increase in employment is usually considered a good
thing and, indeed, it frequently is. But employment
may also increase when, for example, a student cannot afford to remain in school and returns to work or
when a stay-at-home parent is forced to find a paying
job. Clearly, it is not in the interest of society to have
everyone employed. But if this is the case, then how
is full employment to be defined and measured?
The idea that the economy is at full employment
when everyone who wants a job has a job is not
very helpful. Almost anybody can get some sort of

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2

job in relatively short order—the problem is finding a
high-paying job. Everybody wants such a job, even if
currently engaged in other productive activities, such
as going to school or running a household.
Since World War II, employment, measured as a
ratio of population size, has remained relatively stable
over time, although the employment rate generally
has been rising for women and falling for men. In the
postwar era, the U.S. employment rate has averaged
about 60 percent and has remained, for the most part,
within 3 percentage points of this average from 1948
through 2010. Because the population base is large,
a small change in the employment rate can translate
into millions of jobs. For example, in the most recent
recession, the employment rate declined by more than
3 percentage points—almost 8 million jobs.
Figure 1 plots the employment-to-population
ratio in the United States from 1948 through 2010.
Reviewing this data is helpful because employment
grows naturally with the population. The figure reveals
that employment rates for men and women have
evolved differently. First, although rates are lower for
females relative to males, this gap has closed significantly over the past 60 years. The male employment
rate declined persistently in the first half of the sample,
while that for females generally rose. While these longrun adjustments appear to have stabilized over the
past 20 years or so, it remains unclear whether some
notion of “full employment” can be identified. If it
can, then it would appear to differ across genders and
fluctuate over time.
Additionally, employment across different sectors
varies widely even over relatively short periods. This suggests a degree of caution in creating a “one-size-fits-all”
policy for the labor market. Figure 2 shows the employment-to-population ratios for eight sectors. These ratios
have been normalized to 100 in the first quarter of 2000;
therefore, movement in a given sector represents the
percentage change in that sector’s employment-topopulation ratio since the beginning of 2000.
If an economy were to grow along what economists
call a “balanced growth path,” then all of the lines in
Figure 2 would be expected to fluctuate around the
normalized value of 100. Yet clear trends appear in at
least two sectors: a long-run decline in the manufacturing sector and a steady rise in the education and health
services sector—even through the Great Recession.
In terms of cyclical unemployment (unemployment
related to changes in the business cycle), there are no
surprises. Take two extremes: Employment in the construction, mining, and logging sector is highly cyclical,
whereas that in the government sector is not.

another. These transitions are called worker flows.
An analogy may be useful here. Imagine a bathtub
of water with its drain open and the faucet running.
The level of water at a point in time corresponds to the
level of employment. The water draining from the tub
corresponds to the flow of workers losing or leaving
their jobs. The water pouring in from the faucet corresponds to the flow of workers finding jobs. Whether
the water level rises or falls depends on the relative
size of the inflow and outflow. And so it is for the level
of employment.
FIGURE 3

U.S. Unemployment Rate (1976:Q1–2010:Q4)
12
10
8
Percent

6
4
2

2010

2008

2006

2004

2002

2000

1998

1996

1994

1992

1990

1988

1986

1984

1982

1980

1978

0
1976

Joblessness is not the same thing as unemployment,
according to standard labor force survey definitions.
To be classified as “unemployed,” a person who is not
working must report being available for paid work
and having engaged in some job-search activity in the
previous four weeks. (The only exception is for those
temporarily laid off.) People without a job who are not
actively looking for jobs are classified as “nonparticipants” in the labor force.
Conceptually, the distinction between unemployment and nonparticipation is clear enough; it involves
some notion of active job search. The standard labor
force survey asks those without jobs what they have
done to find work (in the previous four weeks). If the
respondents answer “nothing,” they are classified as
nonparticipants. Almost any evidence of active job
seeking warrants classification as unemployed. It is
important to understand that these classifications
are determined by the surveyor. The people being
surveyed are never asked directly whether they are
unemployed or not.
From an economic perspective, however, a person
without a job who had one job interview in four weeks
may not look that much different from a nonparticipant. Indeed, the conceptual distinction is further
clouded by the fact that, in any given month, the
number of nonparticipants who find jobs is as large as
the number of unemployed who do.
On the other hand, the data show that an unemployed person is more likely to find a job than a nonparticipant. This difference in the probability of finding
a job suggests that the unemployed are in some sense
“more attached” to the labor market than nonparticipants. For this reason the labor force is defined as the
sum of the employed and unemployed. The implication, as noted, is that nonparticipants are not in the
labor force.
When a recession hits, the unemployment rate
typically spikes quickly and sharply. Throughout the
following recovery, however, the unemployment rate
typically declines much more gradually. Figure 3 shows
this pattern clearly for the United States: A prolonged
time is needed to rebuild the job-worker relationships
destroyed in a severe recession. If history is any guide,
the U.S. unemployment rate should not be expected to
fall back to pre-recession levels for many years.
The categories of employment, unemployment, and
nonparticipation represent snapshots of labor market
activity at a point in time. However, workers in a given
category will not necessarily remain in that category
for long. Over any interval of time, a number of workers will transition from one labor market category to

SOURCE: Bureau of Labor Statistics/Haver Analytics.

Economists Steven Davis, R. Jason Faberman, and
John Haltiwanger suggest in a 2006 paper (“The Flow
Approach to Labor Markets: New Data Sources and
Micro-Macro Links”) that the economic forces behind
worker flows can be grouped into a “supply” side and
a “demand” side. On the demand side, employers
continuously create new jobs and destroy old ones,
a process that evidently accounts for much of the
observed job mobility and many of the jobless spells
experienced by workers. On the supply side, workers
frequently switch jobs and change their labor market
status for any number of reasons—for example, retirement, family relocation, or schooling. Also on the supply side is a continuous flow of new workers entering
the labor force.
A job vacancy corresponds to an “unemployed job”
from the perspective of a firm. Unemployed workers are looking for unemployed jobs, and vice versa.
(Of course, many job openings are also targeted at
employed workers, and many employed workers are
continued on Page 4

3

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Many Moving Parts
continued from Page 3

also looking for better jobs. The flow of employment to employment transitions is also very large.) On the surface, it seems puzzling that job vacancies should coexist with unemployment. Why
do firms with job openings simply not hire available workers until
the unemployment rate drops to zero or until the available supply
of vacant jobs is exhausted?
One answer is that resource allocation in the labor market is
complicated by “search frictions.” First, firms with job openings and
workers each possess idiosyncratic characteristics that make some
job-worker pairings more productive than others. Second, firms and
workers do not necessarily know beforehand where the best pairing
is located. Both need to expend time and resources to seek out the
best matches. A firm will generally not want to hire the first worker
who comes through the door. Likewise, an unemployed worker may
not want to accept the first job offer. As with unemployment, vacancies vary over the business cycle. In fact, unemployment and job
vacancy rates tend to vary systematically: The unemployment rate
tends to be high when the vacancy rate is low and vice versa.

With the U.S. unemployment rate still very high, many are asking
what might be done about it. The Federal Reserve has lowered
its policy rate as far as it can go. The economy is flush with liquidity (money available for lending). Many firms, however, remain
reluctant to spend on investment and additional labor. For better or
worse, political and fiscal constraints are withholding large expenditures on public works projects.
A key question, as far as policy is concerned, is why many firms
appear reluctant to go “full speed ahead” in their investment
and employment plans as the economy improves. Some argue
that private sector spending remains restrained by psychological
factors—a simple lack of confidence. Others argue legitimate reasons account for the apparent lack of confidence—including the
policy uncertainty caused by political maneuvering in the public
sector that could affect government policy. Your view of these two
perspectives naturally influences your view of what constitutes
desirable policy.
continued on Page 6

Glossary
Bureau of Labor Statistics (BLS)—A research agency of the U.S.
Department of Labor that compiles statistics on employment,
unemployment, and other economic data.

Labor force—The total number of workers in an economy, including both the employed and the unemployed, with the unemployed defined as people 16 years of age or older who are not
working, report being available for paid work, and have engaged
in some job-search activity in the previous four weeks. (The only
exception to this rule is for those temporarily laid off.)

Business cycle—The fluctuating levels of economic activity in an
economy over a period of time measured from the beginning of
one recession to the beginning of the next.

Per capita GDP—GDP divided by population.

Cyclical unemployment—Unemployment associated with recessions in the business cycle.

Participation rate—The percentage of the total population 16
years or older that is willing and able to work and is either
employed or actively seeking employment.

Employed—People 16 years of age and older who have jobs. Standard labor force surveys record a person as employed in a given
month if he or she reports having performed any paid work in
the previous four weeks.

Real GDP—The market value of all final goods and services
produced within an economy during a given period adjusted for
inflation.

Employment-to-population ratio—Represents employment
divided by the relevant population (the civilian noninstitutional
population 16 years of age and older).

Recession—A period of declining real income and rising unemployment; significant decline in general economic activity
extending over a period of time.

Employment rate—The percentage of the labor force that is
employed.

Unemployment—A condition where people 16 years of age and
older are without jobs and actively seeking employment.

Federal Reserve—The central bank of the United States.

Unemployment rate—The percentage of the labor force that is
willing and able to work, does not currently have a job, and is
actively seeking employment.

Fiscal policy—The spending and taxation policies used by the
government to influence the economy.
Full employment—The lowest possible unemployment rate in a
growing economy with all factors of production used as efficiently as possible.

Worker flows—Transitions of workers from one labor market
category to another over time.

Gross domestic product (GDP)—The market value of all final
goods and services produced within an economy during a
given period.
Human resources—People who provide work through their
mental or physical work capabilities.

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4

ECONOMIC SNAPSHOT

Duration of Unemployment
Current Economic Data

1. What causes the average duration of unemployment to
change over time?
Changes in the business cycle cause the average duration of
unemployment to rise and fall: It begins to rise during recessions, generally peaks following, and then declines as the
economy improves, as seen in the graph below.
Average (Mean) Duration of Unemployment (UEMPMEAN)

Q1-’11

Q2-’11

Q3-’11

Q4-’11

Growth Rate
Real GDP

0.4%

1.3%

1.8%

2.8%*

Inflation Rate
Consumer Price Index

5.2%

4.1%

3.1%

0.9%

Civilian Unemployment Rate

9.0%

9.0%

9.1%

8.7%

40
*Advance estimate
SOURCE: GDP, Bureau of Economic Analysis; www.bea.gov.
Unemployment and consumer price index, Bureau of Labor Statistics; www.bls.gov.

35
25

4. The most recent recession started in December 2007
and ended in June 2009. Although the unemployment
rate increased for all groups during that time, which
groups had the highest and lowest increases? Propose
an explanation for the difference.

20
15
10
5

2020

The No High School Diploma group experienced the greatest increase in unemployment (from roughly 6 percent to
roughly 15 percent), and the College group experienced the
least (from roughly 2 percent to roughly 5 percent). The difference is likely related to the skill level of each group and
the type of jobs held by relatively low-skilled workers.

Shaded areas indicate U.S. recessions.
SOURCE: Bureau of Labor Statistics; www.bls.gov.
research.stlouisfed.org.

2. Based on the graph above, how does unemployment
attributed to the most recent recession compare with
that of past recessions?
The average duration of unemployment associated with the
most recent recession is much higher (39 weeks) than that of
past recessions. In the previous three recessions, the duration
of unemployment remained below 20 weeks.

No High School Diploma

16

High School

14

Some College

12

College

10
8
6
4
2

2010

0
2009

A higher level of educational attainment is associated with a
lower level of unemployment.

(2000:Q1–2010:Q4, Ages 25+)

18

2000

3. Based on the graph at right, what is the relationship
between educational attainment and unemployment
rates?

U.S. Employment Rates Across Education Groups

2008

2010

2007

2000

2006

1990

2005

1980

2004

1970

2003

1960

2002

1950

2001

1940

Percent

Weeks

30

SOURCE: Bureau of Labor Statistics/Haver Analytics.

5

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WHAT ’S YOUR QUESTION?

Unemployment
Q. Does the government provide assistance to
unemployed people?
Yes. A federal-state unemployment compensation
program was established as a part of the Social
Security Act of 1935, providing partial wage replacement on a temporary basis to eligible, unemployed
workers. The program is based upon federal law but
is administered by individual states. Although state
benefit formulas differ, there are some consistencies across states. For example, all recipients must
(1) have earned a specific amount of wages, worked
a certain length of time, or met a combination of
wage and employment requirements; (2) be able and
available for work; and (3) be unemployed through
no fault of their own. This limits payments to workers who are unemployed primarily as a result of
economic causes.
Most states pay benefits weekly. Benefits paid
vary by state based on a worker’s record of wages
(within limits) and the benefit formula. In all states,
unemployment benefits are subject to federal
income tax. When unemployment is high, federal
law requires states to extend the amount of time a
worker can receive unemployment benefits.
Q. What are the different types of unemployment?
There are three types of unemployment:
Frictional unemployment is unemployment resulting
from those transitioning from one job to another and
those new to the job market, including recent graduates.

Many Moving Parts
continued from Page 4

The U.S. economy is clearly in recovery mode, even
if the recovery is not very robust. Real per capita
GDP is growing even if employment per capita is
not. A growing GDP combined with zero employment growth necessarily means higher labor productivity (more output is being produced with the same
amount of labor). Some people argue that higher
productivity is responsible for the lack of hiring. But
productivity has been rising for centuries with no
obvious detriment to employment opportunities.
The recovery in GDP, however, has done little to
diminish the belief among some that more should be

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6

Structural unemployment is long-term joblessness
caused by a mismatch in the skills held by those looking for work and the skills demanded by employers.
Cyclical unemployment is unemployment associated with recessions in the business cycle, when
fewer workers are needed to provide the new (lower)
level of goods and services demanded.
Q. In terms of employment opportunities, what
does the future hold?
The Bureau of Labor Statistics (BLS) publishes
long-term occupational employment projections
every 2 years. For the period 2008-18, the expectation is that more new jobs will come from professional and service occupations and growth will be
faster among occupations requiring postsecondary
education. Strong employment growth is expected in
healthcare and in technology, while employment is
expected to decline in manufacturing and in farming,
fishing, and forestry.
REFERENCES
David Andolfatto and Marcela M. Williams. “Many Moving Parts:
A Look Inside the U.S. Labor Market,” in Federal Reserve Bank of
St. Louis Annual Report for the Year 2010. Federal Reserve Bank of
St. Louis, April 2011; http://stlouisfed.org/publications/ar/2010/PDFs/
AR10_Essay.pdf.
Bureau of Labor Statistics. “Employment from the BLS Household and
Payroll Surveys: Summary of Recent Trends.” January 6, 2012;
www.bls.gov/web/empsit/ces_cps_trends.pdf.

done to help the labor market. It is easy to understand the motivation for this sentiment. GDP is a
measure of average income—it sheds no light on
how this income is distributed across the population. Moreover, the incidence of unemployment is
concentrated among the poor and less educated. In
short, there is concern that the prosperity associated
with the recovery will not be shared by all. Determining the best way to ensure shared prosperity without
crippling the system that creates it is always a challenge for policymakers—and it is likely to remain so
in the foreseeable future. Indeed, the labor market
has many moving parts to consider.

BULLETIN BOARD

ALL LOCATIONS

Conversation with Chairman Bernanke:
Town Hall for Educators Video Conference

Real World Economics: Getting
to the “Core” (6-12)

August 7, 2012 • Noon to 5:00 p.m. CST

June 14, 2012 • 8:30 a.m. – 3:30 p.m.

Registration (to open April 6, 2012):
www.stlouisfed.org/education_resources/events/
for all locations: Little Rock, Memphis, St. Louis,
and Louisville

East Arkansas Community College, Forrest City, AR

LITTLE ROCK

Getting to the “Core” with Kid Lit (K-5)
July 17, 2012 • 8:30 a.m. – 3:30 p.m.
Registration: www.grsc.k12.ar.us

June 7, 2012 (K-5); June 8, 2012 (6-12)

J. F. Wahl Elementary School, Helena, AR

Focus on the Economy: Getting
to the “Core” (6-12)

June 11, 2012 (K-5); June 12, 2012 (6-12)

June 26 – 28, 2012

Registration: www.scsc.k12.ar.us/
June 13, 2012 (K-5); June 14, 2012 (6-12)
Northcentral Educational Cooperative, Melbourne, AR

Registration: www.naesc.k12.ar.us/
June 18, 2012 (K-5); June 19, 2012 (6-12)

Jeannette.N.Bennett@stls.frb.org
St. Louis
Mary Suiter
314-444-4662
Mary.C.Suiter@stls.frb.org

Registration: www.grsc.k12.ar.us

Registration: www.afsc.k12.ar.us/vnews/display.v/
SEC/Resources

Barb Flowers
314-444-8421
Barbara.Flowers@stls.frb.org

University of Mississippi, Oxford, MS

Registration: www.mscee.org/, see
“Focus on the Economy”

Scott Wolla
314-444-8624
Scott.A.Wolla@stls.frb.or

S T. L O U I S
Location for all: Federal Reserve Bank of St. Louis

Registration: www.wsc.k12.ar.us/coopcms/

Registration for all:
www.stlouisfed.org/education_resources/events/

July 9, 2012 (K-5); July 10, 2012 (6-12)

Get Money Smart (9-12)

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Ozarks Unlimited Educational Cooperative, Harrison, AR

Registration: www.oursc.k12.ar.us/
July 12, 2012 (K-5); July 13, 2012 (6-12)
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June 20 – 22, 2012 • 8:30 a.m. – 3:30 p.m. each day

July 16, 2012 (K-5); July 17, 2012 (6-12)
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Registration: http://nexus.dmsc.k12.ar.us/
July 23, 2012 (K-5); July 24, 2012 (6-12)

Jennifer Bradford
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Jennifer.L.Bradford@stls.frb.org

April 25, 2012 • 4 p.m. – 8 p.m.

Advanced Placement (AP) Economics
(9-12)

Registration: http://se.sesc.k12.ar.us/index.htm

Louisville
Caryn Rossiter
502-568-9257
Caryn.J.Rossiter@stls.frb.org
Memphis
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901-579-4104

Forrest City Junior High School, Forrest City, AR

July 24, 2012 • 8:30 a.m. – 3:30 p.m.

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Little Rock
Kris Bertelsen
501-324-8368
Kris.A.Bertelsen@stls.frb.org

Registration: www.grsc.k12.ar.us

Smart Economics and the Common Core
Arch Ford Educational Cooperative, Plummerville, AR

Bank Contacts

MEMPHIS

Econ Fest (K-8)
July 18, 2012 • 8:00 a.m. – 3:00 p.m.

Economic Forces in American History
(8-12)
July 23 – 28, 2012

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Registration: http://starfish.k12.ar.us/web/

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Inside the Vault is written
by economic education staff
at the Federal Reserve Bank
of St. Louis, P.O. Box 442,
St. Louis, Mo., 63166.
The views expressed are
those of the authors and are
not necessarily those of the
Federal Reserve Bank of
St. Louis or the Federal
Reserve System.

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