1) The Bureau of Labor Statistics announced that in October 1996, of all adult A
ID: 1196805 • Letter: 1
Question
1) The Bureau of Labor Statistics announced that in October 1996, of all adult Americans, 127,587,000 were employed, 7,221,000 were unemployed, and 66,645,000 were not in the labor force. How big was the labor force? What was the labor-force participation rate? What was the unemployment rate?
2) The following data summarize the expenditures for the country of XYZ during 2003 in millions of alphabet, the currency of country XYZ.
Gross Private Domestic Investment
$300
Business Fixed Investment
$200
Change in Inventories
$100
Exports
$200
Imports
$200
Personal Consumption Expenditures
$800
Government Consumption Expenditures and Gross Investment
$500
Statistical Discrepancy
$10
Depreciation Expenditures
$50
a. Calculate net exports
Net exports = exports – imports
= $200 – $200
= 0
b. Calculate GDP
c. Calculate national income
d. Assume that the GDP deflator is 120 and calculate real GDP for 2003.
3) Autonomous aggregate expenditures decreases by $200 million, the marginal propensity to consume is 0.50, marginal propensity to invest is 0.25, and the marginal propensity to import is 0.10. Calculate the change in income.
4) During the recession of 2007-2009, the U.S. economy was experiencing a decrease in home prices and consumer wealth, a credit crisis in the financial markets, and declining consumer and business confidence. What components of aggregate demand were affected and what was the impact on real output? What were the policy options?
Gross Private Domestic Investment
$300
Business Fixed Investment
$200
Change in Inventories
$100
Exports
$200
Imports
$200
Personal Consumption Expenditures
$800
Government Consumption Expenditures and Gross Investment
$500
Statistical Discrepancy
$10
Depreciation Expenditures
$50
Explanation / Answer
Solution 1:
Labor Force: The Labour force is 134808000 (Employed + Unemployed)
The Labor Force Participation Rate is how many people are available to work as a percent of the total population.
Here's the formula:
Labor Force Participation Rate = Labor Force / Civilian Non-Institutionalized Population
where the Labor Force = Employed + Unemployed
Labor participation rate is 134808000/201453000= 67%.
The unemployment rate is the number of unemployed divided by the total number of people in the civilian labor force.
Unemployment Rate = Unemployed / Civilian Labor Force.
Unemployment Rate is 7221000 / 134808000 = 5%
Solution 3:
The marginal propensity to consume (MPC) is equal to C / Y, where C is change in consumption, and Y is change in income. If consumption increases by 80 cents for each additional dollar of income, then MPC is equal to 0.8 / 1 = 0.8.
Marginal propensity to invest is calculated as I=/Y, meaning the change in value of the investment function (Im) with respect to the change in value of the income function (Y). It is thus the slope of the investment line. For example, if a $5 increase in income results in a $2 increase in investment, the marginal propensity to invest is 0.4 ($2/$5).
The amount imports increase or decrease with each unit rise or decline in disposable income. The marginal propensity to import is thus the change in imports induced by a change in income. An economy with a positive marginal propensity to consume is likely to have a positive marginal propensity to import. This is because a portion of goods consumed is likely to be imported.
MPM is calculated as dIm/dY, meaning the derivative of the import function (Im) with respect to the derivative of the income function (Y).
If the marginal propensity to import is 0.3, then an increase in income of $1 will result in an increase in imports of $0.30 ($1 x 0.3).
Particulars
Propensity
Total
Consumption
0.5
100
Investment
0.25
50
Import
0.1
20
Total Expenditure
170
Change in Income
30
Solution 4:
In the latest recession, employment supported by U.S. consumer spending declined by an estimated 3.2 million jobs between 2007 and 2010, over a third of total job declines during that time frame. Compared with the overall economy, consumer-related employment demonstrated relative resilience, recovering in 2012. Through 2022, consumer spending is projected to support stable job growth with increasing expenditures on labor-intensive services like health care. However, consumer spending and its related employment are projected to grow slower than in the past and at rates similar to the overall economy.
For the past several decades, U.S. consumers have been considered an “engine” of economic growth in the United States.1 In 2012 they were responsible for just under 71 percent of U.S. gross domestic product (GDP), almost 8 percentage points higher than in 1960.2 American consumers have also played a prominent role in the global economy, accounting for just over 15 percent of world GDP in 2012.
When consumers shop, they directly support4 jobs in companies that produce, transport, and sell final goods and services. Consumers also indirectly support jobs that make inputs (intermediates) requisite for final production. More U.S. jobs directly or indirectly relate to consumer spending than to all other sectors of the economy combined. In 2007, which was the business cycle peak prior to the latest economic downturn, 85.1 million non-agricultural wage and salary jobs related to consumer spending; these jobs were 61.5 percent of total non-agricultural wage and salary employment in the United States. But unlike GDP, the percentage of U.S. jobs tied to consumption has fluctuated within a relatively stable range since the late 1970s because of labor-saving technologies and increased consumption of imports.
During the “Great Recession,” which took place from late-2007 through mid-2009, the economy steeply contracted and nearly 8.7 million jobs were lost.6 Consumer spending experienced the most severe decline since World War II.7Households cut spending, shed outstanding debt, and increased their rate of personal savings in response to reductions in income, wealth, confidence, and credit access.8
With persistently high unemployment rates, the weak revival in job growth has been one of the most debated aspects of the recent recession.9 Several structural and cyclical factors have been proposed as causes, including the nature of the financial crisis, dependency of the economy on services, economic and policy uncertainty, extended unemployment insurance, and high long-term unemployment rates.10 Many have also blamed sluggish consumer spending: as Federal Reserve Chairman Ben Bernanke stated in 2011, “Consumer behavior has both reflected and contributed to the slow pace of recovery.”11 Others made stark statements, such as, “Don't expect [U.S.] consumer spending to be the engine of economic growth it once was.”12
Using an input–output methodology, this article estimates U.S. employment related to each final demand component in the latest recession (2007–2009) and during the recovery years through 2012, with a focus on consumer spending. Though consumer behavior during and after the recession has been documented in various papers,13 the relationship between consumption and employment has not yet been quantified in the literature.14 This article also projects the number and type of U.S. jobs relating to consumer spending in 2022 using the most recent economic and employment projections developed by the Office of Occupational Statistics and Employment Projections at the Bureau of Labor Statistics (BLS).15
BLS estimates that the number of jobs tied to consumer demand declined by 3.2 million from the 2007 employment peak to 2010, the year of the employment trough. The 3.2 million were over a third of the total 8.7 million jobs lost in that time frame, and most of the consumer-related job losses were concentrated in three industries: manufacturing, professional and business services, and retail trade.16In contrast, over half of total job losses between 2007 and 2010 occurred in investment-related employment, which is typically more sensitive than consumer-related jobs to the business cycle. The largest annual decline in consumer-related employment occurred in 2009. In 2010, after the recession officially ended, consumer-related employment accounted for the majority of job declines in the entire economy.
Despite the postrecession decline in consumer-related employment and the historic decline in spending, consumer-related employment demonstrated relative stability both during and after the recession, upheld by gains in two sectors: health care and social assistance, 17 and educational services.18 The percentage of jobs in the economy supported by consumers increased (see figure 3) as the share of investment-related employment fell to unprecedented levels. And by 2012, consumer-related employment reached prerecession marks, while overall employment did so in 2014.19 The relative resilience of consumption reflects its stability in comparison with other GDP components during economic slumps.
As the economy continues to recover and the baby boomers age, BLS projects that consumer spending will grow 2.6 percent annually from 2012 through 2022, expanding slower than in the past and at the same pace as the overall economy. The rise of consumer spending as a percentage of GDP is also anticipated to stabilize, thus ending past decades of relative growth in comparison with other GDP components (see figure 1). Consumer-related employment is projected to increase 1.0 percent annually to reach 94.7 million jobs in 2022 (see figure 2), slightly slower than both past growth rates and the projected 1.1 percent annual growth rate for all employment. But as consumer expenditures on traditionally labor-intensive services like health care continue to grow, 63.2 percent of jobs in the U.S. economy are expected to relate to consumption in 2022; this percentage is within the stable historic range (see figure 3). Over half of the new 9.1 million consumer-related jobs are anticipated to be in the health care and social assistance sector, and 94.5 percent of all consumer-related jobs are projected to be in services.
This article is arranged in the following manner: the first section reviews the methodology to translate consumer spending to employment using the input–output system, while the second section goes over prerecession consumption and employment trends. The third section summarizes consumer-related employment during the latest recession and recovery, comparing it with the economy as whole and other GDP components. The fourth section looks at consumer-related employment for major sectors and detailed industries during the latest recession and recovery. The last presents BLS projections of consumer-related and total employment through 2022.
Impact on Real Output:
The U.S. economy entered into a recession at the very end of calendar year 2007 that has
had a profound effect on the nation’s workers, sharply reducing employment levels, increasing the national unemployment rate above 10% by the end of 2009, and driving
up the number of underemployed and the hidden unemployed. While real aggregate output as measured by the nation’s Gross Domestic Product (GDP) bottomed out in the second quarter of calendar year 2009, the National Bureau of Economic Research, the official
arbiter of business cycle dating, has not yet identified the ending date of the recession. In contrast to the recent recovery of product output growth, labor markets continued to deteriorate through the end of calendar year 2009 with only a modest improvement in the first quarter of 2010. The recession of 2007-2009 was converted into a Great Recession for U.S. workers. To explain how this came about is the purpose of this paper. Substantial shedding of employees and cuts in weekly hours of work by corporations allowed labor productivity to rise sharply after 2008. None of these productivity gains were shared by wage and salary workers in the form of higher real weekly earnings. These productivity gains were used to raise corporate profits at a higher relative rate than in any other post World War II recession.
The recession of 2007-2009 began in December 2007 when the cyclical peak of the previous comparisons occurred according to the National Bureau of Economic Research. Changes in the nation’s real GDP from the fourth quarter of 2007 to the first quarter of 2010 are displayed in Table 1. Real annualized output (in 2005 prices) fell from $13.363 trillion in the
fourth quarter of 2007 to $12.861 trillion in the second quarter of 2009 before resuming growth. The decline in real GDP from the previous cyclical peak (2007 IV) to the trough quarter in the second quarter of 2009 was $553 billion or 4.1%. This was the largest relative decline in real GDP from peak to trough in any of the nation’s previous 10 post WWII recessions. The recessions of 1973-75 and 1957-58 were characterized by a 3.2% decline in real GDP from peak to trough.
Following the second quarter of 2009, real GDP has risen for the last three consecutive quarters reaching $13.139trillion in the first quarter of this year, a gain of 2.6% over the past
nine months. Real annualized GDP in the first quarter of 2010 was still $224billion below its peak in the fourth quarter of 2007.
Over the 2007 IV –2009 IV period, real GDP was down by only 2.5%; however, labor
market conditions on a wide variety of fronts had deteriorated much more considerably (Table 2). Over this two year period, nonfarm payroll employment had declined by 8.2 million or 6.0%. Total civilian employment (including the self-employed) had dropped by 8.04 million or 5.5%. Average (mean) weekly hours of work in the private sector fell by .8 hours or 2.3%, and the number of workers reporting themselves as employed part-time for economic reasons more than doubled from 4.53 million to 9.21 million. The nation’s civilian labor force fell by 414,000 over this two year period at a time when the U.S. Bureau of Labor Statistics had earlier projected that it would rise by more than 3 million. The steep decline in employment drove up the official
unemployment rate from 4.8% in 2007 IV to 10.0% in the fourth quarter of 2009, a more than doubling. Adding in the 9.2 million underemployed and the 5.7 million members of the labor force reserve or “hidden unemployed” in the fourth quarter of 2009 would have increased the underutilization rate to close to 19%.
Policies to overcome recession:
Many conservatives argue that our economy can flourish only when the federal government gets out of the private sector’s way. Many progressives counter that in our free market system, there are times when the government needs to step in to protect the common good and ensure there is broad-based economic growth. This debate defines our politics today.
Americans of all political persuasions, however, should agree that quick and decisive government action was necessary between 2008 and 2010 to avoid a second Great Depression and to help our economy recover from the deepest recession since the 1930s. After all, the evidence is clear that three acts of Congress signed by two successive presidents between 2008 and 2010 led to the end of the Great Recession of 2007–2009 and the subsequent economic recovery. Specifically:
This column will detail the top 10 reasons why these three key government interventions in the economy were successful. But first, let’s briefly recount the reasons why such government action was necessary in the first place.
Remember the situation in 2008? Our economy, employment, and Wall Street were all about to go off the cliff. The time between then and now was marked by a sharp economic contraction alongside massive job losses and steep stock market losses—followed by slow, at times uneven, but still steady recoveries in economic growth and the labor and financial markets. Federal government policies had a lot to do with making sure that the deep dive was not lengthier, and that the recovery happened sooner than it otherwise would have. The labor market, the economy, and financial markets are clearly on the mend. This is a far cry from the situation in 2008.
The Troubled Asset Relief Program in 2008, the American Recovery and Reinvestment Act of 2009, and the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010 successively helped the U.S. economy turn itself around. These three measures came at crucial times when the economy was facing the prospect of experiencing serious damage unless policymakers took decisive, targeted, and quick actions.
The Troubled Asset Relief Program was enacted in October 2008 so that the federal government could use $700 billion to stabilize the struggling financial system. Much of the first half of that money was spent injecting cash into troubled banks during the final months of 2008, ensuring that our financial system did not collapse. The American Recovery and Reinvestment Act was enacted in February 2009, implementing a series of tax cuts and spending measures that totaled $787 billion for almost two years through the end of 2010. Additional unemployment insurance and Social Security benefits started to flow almost immediately due to the Recovery Act, while it took until the summer of 2009 for infrastructure spending to start. Congress then enacted new payroll tax cuts and continued extended unemployment insurance benefits in December 2010 as the Recovery Act’s benefits ran out.
The result: Financial markets, the economy, and the labor market started to improve quickly after each measure had been passed and money started coming to key struggling markets. These three policy measures did exactly what they were meant to do—policymakers acted to avoid worsening economic conditions.
To be sure, these policy interventions could have been more effective and efficient if they had delivered a stronger bang for their buck. The Troubled Asset Relief Program could have included more help for struggling homeowners. The Recovery Act could have included more infrastructure spending, and the payroll tax cuts and extended unemployment insurance benefits could have been decoupled from wasteful tax cuts for the rich. None of this extra help for our economy and workers was possible, though, because of conservative opposition to more effective and efficient policy interventions.
Still, the Troubled Asset Relief Program saved the financial system from implosion. While one can legitimately question the design of the program, whether the benefits from it were fairly shared, and whether the funds were used as efficiently as possible for the long run, there’s little question that it did benefit the economy. The Recovery Act certainly prevented another Great Depression. And the payroll tax cuts and extended unemployment insurance benefits continue to strengthen the economic recovery today.
Here’s a rundown of the 10 ways recent economic and financial data show that each of these three policy measures worked as intended, beginning with the Troubled Asset Relief Program, then the Recovery Act, then the most recent payroll tax cuts and extended unemployment insurance benefits.
Particulars
Propensity
Total
Consumption
0.5
100
Investment
0.25
50
Import
0.1
20
Total Expenditure
170
Change in Income
30
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