A Decade of Unemployment
Ray Mizan | Macro | 2nd Period
- Research Question: What effect have changes in the economy had on unemployment in the United States in the last 10 years?
- Why and how have things changed economically?
- What kinds of jobs have been affected?
- How has the government been involved and to what extent were they effective?
- What were the ramifications of government intervention in the economy?
- The economy was going through a expansion during 2005, despite several setbacks. The economy grew by 3.5%, 2 million jobs were added, unemployment continued to decline from 5.4% to 4.9% and labor productivity continued to rise.
- Natural disasters like Hurricane Katrina took a toll on jobs (600,000), shipping, and infrastructure. This caused an increase in energy prices. The federal government spent money to rebuild.
- After Hurricane Katrina, around 200,000 people had a job, but could not return to work due to inclement weather.
- To counter anticipated inflation, The Fed began an 18 month policy of increasing the interest rates. The Federal Funds rate went from about 1% to 4.25%. Overall inflation was around 2%, and the stock market had marginally higher gains compared to 2004.
- 2005 was a period of solid economic growth and expansion. We saw an overall decrease in nearly all types of unemployment.
- Despite the labor force growing, the overall participation rate was unchanged. Due to the economy expanding at the time, the number of cyclically unemployed workers declined. The number of people who worked part time declined, while he number of those with multiple jobs remained the same.
- Employment continued to grow in 2005 among workers in management positions, professional positions, sales, and construction occupations.
- Median weekly earnings for full-time wage and salary workers increased less than the inflation rate, as measured by the Consumer Price Index.
- Women’s median weekly earnings, at $585 in 2005, grew by 2.1 percent, compared with a 1.3-percent increase in men’s earnings
- The U.S. economy continued to grow in 2006. This growth was slower compared to previous years. A little under 2 million new jobs were created and the unemployment rate fell from 4.7% to 4.4%. Some areas were practically at full employment.
- The Fed continued their now 2 year policy of raising interest rates and the Federal Funds Rate to combat impending inflation. The Fed did temporarily halt increases to rates due to pressure from the housing market and higher gasoline prices.
- Consumer prices and GDP grew steadily while inflation hit a new low. Unfortunately, labor productivity growth slowed. Because American's spent more on foreign goods, the trade deficit went up.
- In 2006, the economy added on average 149,000 new jobs per month, down from 165,000 new jobs in 2005 and 175,000 in 2004.
- In 2006, wages and salaries composed an even smaller portion of national income, 51.4 percent, the smallest share since 1947.
- Unemployment levels and rates were lower at the end of 2006 than a year earlier.
- The number of persons who were unemployed due to job loss declined in 2006, as did the number of long-term unemployed.
- Despite the labor force growing by over 2 million, the participation rate remained relatively unchanged.
- The percentage of self employed people remained unchanged at 7.3%, and there was an increase in management, construction, and service sector jobs.
- The number of discouraged workers decreased. The number of Part-time job holders and multiple job holders remained relatively unchanged (4.2 million). Median weekly earnings and salaries increased for all.
The Burst of the Housing Bubble
- The Great Recession was a result of bad choices by lenders and borrowers, perverse incentives and moral hazards. The catalyst for this economic downturn was the collapse of the domestic housing market.
- Housing markets were usually seen to be low risk and high return. Foreign and domestic investors put their money into the U.S. Housing Market, hoping to get a return on the interest rates paid on mortgages.
- Mortgage-Backed securities are asset backed securities that are secured by a collection of mortgages. These are sold to an investment bank which then packages the loans together into a security that investors can buy. Investors had faith in these securities due to rising house prices. Credit rating agencies also convinced investors that mortgage backed securities were sound investments, giving them a AAA rating. These assets were backed by complicated financial contracts that had little transparency.
- In order to create more MSBs, they needed more mortgages so they lent money to people with low income and poor credit scores (Subprime Mortgages and Predatory Lending Practice).
- Traders sold CDO's, which were backed by risky loans and contracts, but credit rating agencies called them safe, and investors continued to pour their money into risky assets.
- Housing prices increased, borrowers began defaulting. Which put more houses on the market for sale, but demand was low and prices began to plummet. Which caused a chain reaction.
- Some lenders were left with bad loans and ended up declaring bankruptcy.
- Credit Default Swaps, were sold as insurance against MSBs, but financial institutions did not have money to back them up so they declared bankruptcy (AIG).
- All these assets, liabilities, and risks created a domino effect that crippled the entire financial sector.
- Financial Institutions like AIG, Lehman Brothers, and Bear Stearns, either declared bankruptcy, merged with other institutions, or were bailed out by the government.
- The Fed made loans to banks that were safe but had "unruly" lenders.
- TARP (Troubled Assets Relief Program) was enacted which spent around hundred of billions of dollars bailing out banks
- Government accountants scrutinized Wall Street Balance Sheets
- Congress enacted the Stimulus Package (American Recovery and Reinvestment Act of 2009) which would funnel 800 billion dollars into the economy in order to create jobs.
The Effect on Employment
- The Unemployment Rate went from 4.6% to almost 10% as a result
- Most were cyclically unemployed
- For all of 2008, the United States incurred a net loss of 3.617 million jobs, and for 2009, a net loss of 5.052 million jobs. Unemployment rose from 5% in December 2007 to peak at 10% in October 2009.
- In 2008 the age group 25 to 54 years old experienced severe increases in unemployment; men in the age group experienced greater increases in unemployment than did women.
- Young workers were affected by poor labor market conditions more than workers aged 55 years and older were.
- Groups of people with less education qualifications experienced greater percentage-point increases in their unemployment rates.
- The number of persons employed part time for economic reasons increased significantly
- Employment increased for management, professional, and service jobs, but decreased for construction, sales, office, production, and transportation jobs.
- Industries that manufactured goods experienced the largest declines in employment during the Great Recession, along with construction industries.
- Employment actually increased in education and health during the Great Recession. Employment has increased in education and health services for the last 3 decades, regardless of the stage in the business cycle.
- Construction had a 14% decrease
- Manufacturing had a 10% decrease
- Retail had a 5% decrease
- Financial Sector had a 4.5% decrease
- Professional and Business Services had a 6% decrease
- Education and Health had a 2% increase
- Continuation of Fiscal and Monetary Policies
- The Fed continued to purchase mortgages and treasury bonds, putting liquidity into the economy. Started to grow, but very slowly
- GDP growth was under 3%
- Dollar value declining due to government spending
- Most major banks had repaid extraordinary loans with interest
- Companies like General Motors and AIG began to repay government cash advances
- Housing Market was still struggling
- Unemployment rate went from 9.7% to 7.8%
- The number of persons unemployed because they lost their job declined
- The number of persons employed part time for economic reasons declined to 8.5 million in 2011.
- 40% of workers were employed in management, professional, and related occupations, 24% of employed persons were in sales and office occupations, 12% were in production, transportation, and material moving occupations, and 9% were in natural resources, construction, and maintenance occupations.
- Employment in service occupations accounted for about 18% of total employment.
- Weekly earnings increased against slow inflation.
- Significant recovery from Great Recession
- Improving numbers from the auto, housing, and financial sectors
- General Motors was able to purchase back the final shares of its stock that had been held by the U.S. Treasury Department
- Home sales rising by 13% in the largest 20 markets
- The Fed kept short term interest rates near zero, continued to inject money into the economy via purchasing U.S. Treasury and Mortgage Bonds
- Affordable Care Act and the healthcare sector
- Significant increase in budget deficit
- Unemployment rate decreased from 8.0% to 5.0%
- Unemployment rates declined for most groups of people
- Decrease in cyclically unemployed
- The number of people employed part time for economic reasons declined to 6.9 million in 2014
- Labor force increased by over 2 million, yet the rate of participation remains essentially unchanged
- Unemployment rate among veterans and disabled declined significantly
- Unemployment rates declined for people at all education qualification levels
This project has allowed me to broaden my perspective on unemployment in economics. In this course I learned the basics of unemployment, and the effects of changes in the economy on unemployment, but this project allowed me to learn the actual ramifications of changes in the economy on unemployment. Whether it is a relatively stable economic expansion or a severe economic recession, sometimes one group of workers is affected more than others, and some see little to no effect. It was also interesting to research the causes and effects of the financial crisis and speculating upon how to prevent something like that from happening again. Overall this project was a great learning experience.
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