March 29, 2002
Have Unemployment Rates Peaked in Indiana?
For generations of Americans, getting a read on the economy has always been pretty simple. If you're working, then things are OK. And if you're out of work, they are not. While there are a few shades of gray to this black and white definition, the reality for most households is that this simple employment question looms largest in determining our economic well-being.
When you add up the answers to that question for all of us, you eventually get something economists call the unemployment rate. That simple percentage is, for most of us anyway, the single most important statistic used to describe the state of health of the economy. And so it’s only natural that right now, as we sit on the bubble between recession and recovery, the spotlight has intensified on the recent data on joblessness. If the recession has ended, it stands to reason, then rising unemployment rates should now be heading back down.
If only it were that simple. Those of us who have tried to make sense of state and regional unemployment statistics over the last several years know all too well that the relationship between unemployment and the economy is a bit more complicated.
In fact, even with the resumption of economic growth, most economists expect the unemployment rate, both nationally and regionally, to rise through much of this year. Our Ball State forecast calls for U.S. jobless rates to top out at 6.0 percent by year end, with Indiana unemployment rates hitting that same mark, even as the economy expands. With the most current data putting us at 5.1 percent in February, that says we have some time to go before we can put higher unemployment rates behind us.
Indeed, if you want to get an early read on whether an economic recovery is taking hold, the unemployment rate is just about the last place to look. Jobless rates have always reacted with a delay to changes in the economy, for two closely linked reasons.
The first is the hoarding of workers by companies who suffer a slump in business. Given the high costs of rehiring, training and retaining workers with specialized skills, businesses who perceive a downturn to be temporary will usually not pare back their workforce as much as their sales declines would seem to dictate. The upshot is that a rebound in business can initially be absorbed with minimal increases in hiring.
The other half of the puzzle is the contraction and expansion in the labor force. Movements in and out of the work force occur in our economy much like ocean tides, expanding and contracting the pool of employed and available workers. Just as a red hot labor market can be a magnet, bringing in workers who might otherwise be students, retirees, or full-time homemakers, so can a slumping economy cause workers to exit the work force to chase other pursuits. When the rate of new hiring in the economy is less than the inflow of new workers, the result is a higher unemployment rate.
The picture of a turnaround in the U.S. economy becomes clearer with almost every new report we receive. But past experience tells us that jobless rates will be riding in the rear, not in the lead, of the economic recovery.
About the Author
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