Situation report from the Labor Department seems like unambiguously
positive news across the board: jobs are up, unemployment is down,
earnings are up, and the duration of unemployment spells is down.
But it contains a real surprise: the unemployment rate keeps
trending down below expectations and now stands at 5.0 percent.
While conventional wisdom is stuck in the mindset that the U.S.
economy is weak, the data continue to say otherwise. According to
the text of the report,
jobless rate in June was 5.0 percent, seasonally adjusted. It has
trended downward since February 2005 and is now 1.3 percentage
points lower than its most recent high in June 2003. The number of
unemployed persons was little changed over the month at 7.5
million, but is down by 1.7 million since June 2003.
introductory economics are taught that there is a "natural" rate of
unemployment above zero, an acknowledgement that there are always
some people between jobs. The naïve belief is that a fully
performing economy would employ one hundred percent of its willing
workers, but experience and economic analysis teach us otherwise.
If the average worker is between jobs for just six months per
decade, then the average unemployment rate is five percent. If the
rate drops below the natural level of employment, labor markets get
too tight, and wage inflation takes off as firms bid up scarce
The orthodox view
for many decades was that the "natural" rate of unemployment was
somewhere between 5.5 and 6.0 percent. The unemployment rate's
descent to the 4-percent range in the late 1990s made many
economists skittish about saying exactly what the natural rate is.
As a result, you won't find many economists speculating about
whether the current rate is natural or unnatural, but there is no
doubt that a 5.0 percent unemployment rate is better than good and
a symbol of real economic strength.
Two Key Points About
the Unemployment Rate
- The last time the
rate was 5.0 percent was in September 2001.
- The unemployment
rate averaged 5.8 percent in the 1990s and 7.3 percent in the