Ask an Economist

Ask An Economist*

by: David Kaiser and Brian Skalbert, Economics Trends, Nebraska Workforce Development, Labor Market Information Center.

Will there be any signs when our economy leaves this state of “sluggishness?” If yes, what are they?

Of course there will be signs when our economy exits this state of “sluggishness.” In fact, there could be many signals that come in a variety of ways.

For starters, the national unemployment rate will likely begin to decrease. The unemployment rate is one of the most highly publicized indicators of American economic status. To be considered unemployed, a person must be willing to work but unable to find a job. When the unemployment rate begins to drop for two or more consecutive quarters, it signals that the economy is beginning to work towards full employment, where everyone wishing to work will have found it.

Another prominent factor that will appear once our economy picks up the pace will be increases in inflation. Inflation will start to increase every month, unlike the month of April where we saw a mild deflation. Inflation, as defined by the Consumer Price Index (CPI), is the average change in prices over a given time period, typically a month, in a “market basket” of representative goods and services purchased by consumers. Inflation increases when consumers are making more purchases, resulting in too much money and chasing too few goods. When the economy is expanding, consumers are spending and the inflation rate grows.

Just as significant and publicized will be interest rates. When the American economy turns around, interest rates will rise. Interest rates are raised and lowered by the Federal Reserve, currently being chaired by Alan Greenspan. In order to promote borrowing and spending by consumers and businesses during times of stagnation and recession, the Federal Reserve will lower interest rates. Changing interest rates is relatively easy and has much faster results than using fiscal policy, increasing government spending, or decreasing taxes.

What is the living wage? Whom does it apply to?

The living wage in America is the wage [at which] a family with one worker would be able to live above the poverty level. Poverty levels are set at different levels of income and are compared to the number of people in the household and their ages. For example, a family made up of five people with two adults under the age of 65 and three children under the age of 18 would have a poverty threshold of $21,469. Thus, the family’s living wage would need to be greater than or equal to $21,469. Other factors such as age, number of people in the household, and children under the age of 18 can increase or decrease the poverty threshold. In order to determine the poverty threshold for a family, visit http://www.census.gov/hhes/poverty/threshold.html

Some cities around the U.S. have already set living wages for their citizens. On November 27, 2002 New York City set a living wage minimum for workers at $8.10 [per hour] including benefits, or $9.60 without benefits. This program extended to over 50,000 workers who provide service and business to the city, specifically in the areas of healthcare, foodservice, and day care. Cincinnati also created a living wage policy in November of 2002 with any service [...] contractor and the city itself to provide at least $20,000 in wages to workers, either by setting wages at $8.70 an hour including health benefits, or $10.20 an hour to workers excluding benefits. Many other cities including Louisville and New Orleans, as well as numerous state counties have already enacted living wage policies for many of its citizens.

In the case of inflation, prices would increase, making those workers with a fixed living wage less likely to purchase the things they want. Cost of Living Adjustments would require employers to increase the living wages of workers to keep products affordable. It is also [important] to remember that the living wage is different than the minimum wage. The minimum wage, which is currently set at $5.15 an hour, requires that workers must be paid no less than the minimum for their services. Also, the minimum wage may not cover the amount needed to maintain the poverty threshold.

What is the difference between seasonally adjusted and not seasonally adjusted data?

If a person were to look at a chart displaying employment levels for a given geographic area over a 12-month period, that person would see that employment tends to rise and fall significantly at different times of the year. These peaks and valleys correspond with seasonal hiring and layoff patterns associated with certain industries. For example, retail businesses tend to hire additional workers during the holiday season. These workers raise employment levels in the last quarter of each year, peaking in December. By January, employment levels have fallen significantly as the seasonal workers are let go. The same seasonal trends can be seen in agricultural industries as additional workers are hired to assist during planting and harvesting seasons.

Since there is such seasonality in employment, data users often have a difficult time identifying any short-term trends in the employment levels. To allow for better short-term analysis, economists often use statistical programs to adjust the monthly data to remove the effect of seasonal influences -- a process referred to as smoothing. Therefore, if the monthly data is not adjusted for seasonality, it would be considered not seasonally adjusted and would show the large increases and decreases throughout the year. Likewise, data that has undergone a smoothing adjustment would be considered seasonally adjusted.

So which data series is more valuable to the user? That depends on what you want to analyze. If you wanted to analyze general employment trends throughout the year, without seasonal effects, you would want to use seasonally adjusted data. Seasonally adjusted data should show the true direction of monthly employment growth. On the other hand, if you wanted to know how much employment has grown from October to December due to the holiday season, you would want to view not seasonally adjusted data. When comparing data across states, regions, etc., and you are using seasonally adjusted data, make sure that all your data sets are seasonally adjusted. The same reasoning would apply if you were comparing data that was not seasonally adjusted.

*Used with permission. Originally published in the July and November 2003 issues of Economic Trends.

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