Full text of Pieces of Eight : Business : An Eighth District Perspective, Fall 1985

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Business
AN EIG H TH DISTRICT PERSPECTIVE
FALL 1985

Eighth District Unemployment Trends —
A Phantom Army of the Unemployed?
Official estimates of unemployment rates for Eighth Federal
Reserve District states registered sharp increases relative to
the national unemployment rate in the mid-1970s. Subsequent­
ly, these unemployment rates remained higher than the na­
tional rate throughout the 1979-84 period, leading a number
of observers to conclude that the problem of unemployment
had become relatively more severe in these states.
This shift in relative unemployment rates is important. Federal
grants to economically distressed areas depend, in part, on
state unemployment estimates, so a shifting pattern of
geographical unemployment can have significant consequences
for the distribution of federal funds.
Chart 1 (see page 2) is a plot of seasonally adjusted quarterly
unemployment rates in the Eighth Federal Reserve District
(labeled District) and the nation (labeled U.S.). For this study,
unemployment data for Arkansas, Kentucky, Missouri and
Tennessee are used to represent the Eighth District. With the
exception of one fairly short period, the two unemployment
rates appear to track one another quite closely. Before the
mid-1970s (not shown), the District’s unemployment rate rose
and fell in tandem with the national average, though the District
rate was lower. Beginning about 1977, however, the District’s
unemployment rate began rising relative to the nation’s, and
by mid-1980 it had risen above the national average. The District
unemployment rate ceased its acceleration in 1980 and has
been tracking the national average since then, although at a
higher level.

Some Common Explanations...and
Some Puzzles
A number of explanations for the apparent
shift in these relationships have been advanced.
In most cases, analysts attribute the change to
structural shifts in the national economy that
have had large adverse consequences on
particular states. Some believe that various
geographic areas are not attracting an adequate
share of new capital investment spending.
Others believe the structural shift is the result
of the international economic situation as well




as changes in tax policies. Still others attribute it to the shift
of the United States toward a service economy or to employmentmigration trends. Each of these “maladies” suggests a particular
cure, most of which carry substantial price tags.
One difficulty with these explanations is that the increase
in District unemployment is not apparent in other indicators
of local area economic activity. Presumably, a sharp, permanent
increase in unemployment rates would tend to lower growth
rates of total employment, personal income and mortgage
lending. None of these series, however, exhibits the sharp
changes found in the unemployment series.

An Alternative Explanation
The explanation that the shift in the relationship between
District and national unemployment rates is due to a change
in the structure of the economy conflicts with other relevant
data. The following analysis indicates that the shift that occurred
in the late 1970s reflects a change in the method of estimating
local area unemployment statistics rather than an economic
phenomenon. For this reason, District unemployment rates
are not comparable across time and the sharp rise in the District
unemployment rate is simply a statistical artifact.

Estimating Unemployment Statistics

The Department of Labor uses two different methods to
estimate unemployment statistics. Prior to the mid-1970s,
estimates of statewide unemployment rates depended heavily
on the number of people who applied for
unemployment insurance. On the other hand,
the national unemployment rate was (and still
is) based upon a monthly survey of 60,000
households known as the Current Population
THE
Survey. Since different data were used to
FEDERAL
RESERVE
estimate
state and national unemployment
HANK of
rates, it is not surprising that averages of reported
ST. IXHUS
statewide unemployment rates differ from
the national rate during this period.

FALL 1985

FEDERAL RESERVE BANK OF ST. LOUIS

Chart 1
UNEMPLOYMENT RATE

The 1976 and 1978 Revisions

Accounting for the Revisions

The Department of Labor changed its method of estimating
state unemployment rates during the mid-1970s. In 1976, it
began to adjust annually the reported estimates of statewide
unemployment (which were based on unemployment
insurance claims) to make them conform more closely to
the unemployment estimates for the state produced by the
Current Population Survey. A further change was adopted
in 1978 when this adjustment was instituted on a monthly
basis.1
The mid-1970s increase in the District’s unemployment
rate relative to the national rate is similar to an increase in
the measured temperature that results when shifting from
a Celsius to a Fahrenheit scale. The numbers increase, but
it is no warmer. When the method of measuring the District’s
unemployment rate is held constant, District unemployment
shows no sharp acceleration relative to the national rate in
the mid-1970s.

Chart 1 also includes a plot of the District unemployment
rate (labeled ALT District) which holds constant the method
of estimating unemployment. The official estimate of
unemployment for the District (labeled District) and the ALT
estimate are virtually identical through 1976. Beginning in
1977, the two estimates diverge, with the official estimate
also rising sharply relative to the U.S. average. The
alternative estimate (ALT District), which shows no sharp
break at this time, remains below the U.S. average and, in
1981, appears to fall slightly relative to the national
unemployment rate.
The data plotted in chart 1 indicate that the increase in
the unemployment rate in the District relative to the U.S.
rate vanishes when both are estimated by the same technique.
While it may be the case that unemployment is a more
serious problem in the District than in the nation, these data
suggest that its relative severity did not change in the late
1970s and early 1980s.

‘See G. J. Santoni, “ Local Area Labor Statistics—A Phantom Army of the
Unemployed?” Review, April 1985.

—Kenneth C. Carraro and G. J. Santoni

Business—An Eighth District Perspective is a quarterly summary of business conditions in the area served by the Federal Reserve
Bank of St. Louis. Single subscriptions are available free of charge by writing: Research and Public Information Department,
Federal Reserve Bank of St. Louis, P.O. Box 442, St. Louis, Missouri 63166. Views expressed are not necessarily official
positions of the Federal Reserve System.



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 IS

FA LL 1985

E IG H T H D IS T R IC T B U S IN E S S D A T A
G ro w th R a te s 1
C u rren t P eriod
G e n e ra l B u sin es s In d e x e s 2

Y e a r-to -D a te 1 9 8 5

19 84

M ay-Ju ly

Arkansas
Kentucky
Missouri
Tennessee

1.2%
0.4
2.8
-1 .5

R e ta il S a le s 3

0.7%
3.2
2.6
1.3

3.2%
5.0
3.5
6.7

8.8%
6.2
21.2
14.3
3.7

7.6%
2.4
0.1
9.0
10.9

3.0%
1.9
0.1
-3 .1
5.0
1.4
0.3
0.5
2.4
1.3

4.4%
3.8
4.6
3.7
4.0
2.8
3.3
3.7
3.9
4.7

4.0%
4.6
4.1
3.2
1.1
0.1
1.4
1.2
5.5

3.7%
2.6
- 1 .7
3.5
3.6
5.5
6.1
6.2
5.7

A p r-J u n e

10.7%
19.6
34.7
20.7
14.7

United States
Arkansas
Kentucky
Missouri
Tennessee

M ay -Ju ly

P ay ro ll E m p lo y m e n t

2.8%
0.5
0.1
-0 .5
0.5
2.9
-0 .8
-0 .3
2.4
-0 .6

United States
District
Arkansas
Little Rock
Kentucky
Louisville
Missouri
St. Louis
Tennessee
Memphis

M ay-Ju ly

A v e ra g e H o u rly E a rn in g s -M fg .

2.9%
3.7
-3 .6
3.5
0.6
2.2
-0 .4
0.8
0.9

United States
Arkansas
Little Rock
Kentucky
Louisville
Missouri (June)
St. Louis (June)
Tennessee
Memphis

1st q u a rte r ’85

P e rs o n a l In c o m e

6.1%
4.2
4.5
3.9
3.4
5.3

United States
District
Arkansas
Kentucky
Missouri
Tennessee

6.1%
4.2
4.5
3.9
3.4
5.3

E m p lo ym en t1
(curren t period M ay-July)
Y e a r-to -D a te 1 9 8 5

Y e a r-to -D a te 1 9 85

S am e P erio d 19 84

1984

9.1%
9.5
8.7
10.3
9.5
9.4

P rices1
(cu rren t period M ay-July)
Y e a r-to -D a te 1 9 8 5

S a m e P e rio d 1 9 84

K e y In d u s tr ie s

Fabricated Metal Products
Electrical and Electronic Equipm ent
Nonelectrical M achinery
Transportation Equipm ent
Food and Kindred Products
Textile and Apparel
Printing and Publishing
C hem icals and Allied Products
C onstruction



1.0%
- 4.6
-3 .4
-2 .3
-0 .6
-5 .3
1.1
-0 .8
2.0

20.1%
8.2
14.2
8.5
-0 .3
4.7
6.3
-1 7 .1
19.3

0.8%
1.6
2.2
2.6
-2 .4
0.1
6.2
1.3
2.5

3.4%
4.1
3.1
1.2
5.6
2.4
7.2
3.5
3.2

3

E IG H T H D IS T R IC T B U S IN E S S D A T A
Current
P erio d *12
3
Unemployment Rate
United States
D istrict
Arkansas
Little Rock
K entucky
Louisville
M issouri
St. Louis
Tennessee
M em phis

P revious
3 M onths

A verag e Yearto -D ate 1985

A verag e
1984

7.3%
7.7
8.1
6.0
7.9
7.7
7.0
7.7
8.0
6.2

7.3%
7.7
8.1
6.2
8.2
7.9
6.8
7.8
8.1
6.3

7.5%
8.4
8.9
7.1
9.5
8.6
7.2
8.1
8.5
7.2

$850.8
95.0
164.0
265.2
326.7

$842.2
97.1
179.1
265.3
300.8

$830.4
115.7
167.5
251.4
295.7

May-July
7.3%
7.7
8.2
6.2
8.5
7.9
6.6
7.9
8.0
6.4

Construction Contracts4
(m illions of dollars)
D istrict
Arkansas
K entucky
M issouri
Tennessee

May-July
$909.1
104.2
212.8
304.2
288.0

NOTE: With the exception of construction contracts and employment and prices in key industries, all data are seasonally adjusted.

1Data are presented as three-month averages to minimize distortions due to the large variability of monthly data. The current period
growth rate is a comparison of the average of the current three months to the average of the previous three months. The year-to-date
growth rate is from the average of the three months ended in December 1984. All growth rates are compounded annual rates of change.
2Sources: Arkansas and Missouri from Southwestern Bell, Kentucky and Tennessee from South Central Bell.
3Sources: Arkansas from Southwestern Bell, Kentucky from Kentucky Revenue Department, and Missouri/Tennessee from U.S.
Department of Commerce.
4Source: F.W. Dodge, Construction Potentials, McGraw-Hill Information Systems Company, proprietary data provided by special permission.