Today, the Bureau of Labor Statistics released the May
employment report, which showed that the labor market has continued
to weaken. The unemployment rate spiked from 5.0 percent to 5.5
percent, the largest jump in over 20 years, and employment declined
by 49,000 jobs. This is the fifth straight month of a reduction in
employment, and private employment has been negative for half a
May Employment Report
The large jump in the unemployment rate has grabbed media
headlines. A 5.5 percent unemployment rate is the
highest since July 2004. The unemployment rate has increased a full
percentage point since the start of 2007, an indication of a
There are, however, two reasons why this large jump in the
unemployment rate should not be extremely worrying. First, the
unemployment rate increased because a large number of individuals
entered the labor force. Actual labor force participation increased
to its highest level in over a year. An increase in the
participation rate is a good thing for the economy as it increases
the number of workers who can contribute to economic growth. Many
of these new entrants to the job market could not find work,
however, and this increased the unemployment rate.
The other, very unusual aspect is that this monthly report has a
large jump in the number of teenagers in the labor market.
Teenagers, those ages 16 to 19, make up a very small percentage of
the labor force, less than 5 percent. In this month, almost half of
the new entrants to the job market were teenagers. Furthermore, the
numbers of unemployed teenagers, who have a much higher
unemployment rate than workers 20 and older, accounted for about a
third of the total increase in unemployment. It appears that the
increase in the labor force participation rate and the unemployment
rate was affected by the disproportionate number of teenagers in
this month's survey.
The other side of the employment report, the payroll survey,
reported that the private sector shed 66,000 jobs and government
hiring increased by 17,000. Construction and manufacturing
continued to be hard-hit, losing 34,000 and 26,000 jobs,
respectively. Retail trade (-39,000) was down with large jobs
losses in department stores (-14,900) and the transportation sector
(-10,500). Professional and business services (-39,000) was sharply
down, mostly due to the downturn in accounting (-10,200) and
temporary employment (-29,600).
On the positive side, the downturn in the financial services
sector appears to be mostly over with only a small decline of 1,000
jobs in May. Education and health services (+54,000) increased
hiring the most. Leisure and hospitality (+12,000) also had job
A positive note to this report is that it does not show a great
deal of job loss due to layoffs and firings. The increase in
unemployment came from new entrants and re-entrants to the labor
force, many of whom were the teenagers. A slightly worrying aspect
is the reduction in the number of hours worked and the decline of
temporary help, both of which can be leading indicators for future
Dangers to the Economy Posed by
Although the details of the employment report show the economic
situation is not as dire as the initial numbers imply, the economy
clearly faces challenges. Chief among them is the rising cost of
energy. The average price of gasoline is $3.98 a gallon, up sharply
from a year ago. Because reducing energy consumption is
difficult for many consumers--commuters cannot change how long it
takes them to drive to work without changing where they
live--higher energy prices act like a tax on consumers that reduces
the amount consumers can spend on other goods and services. The
high cost of energy hinders the entire economy.
This is exactly the wrong time for Congress to consider
legislation making energy even more expensive. The Lieberman-Warner
Climate Security Act would do exactly that. Lieberman-Warner sets
up a cap-and-trade system that requires companies to buy a capped
number of permits to emit carbon dioxide. The government would cut
the number of permits by 70 percent by 2050. As the permits became
scarcer, companies would have to pay progressively more in permit
auctions to be able to emit carbon dioxide, and they would pass
these higher energy costs on to consumers. Lieberman-Warner is an
energy tax under a different name.
Lieberman-Warner would make energy substantially more expensive
for consumers. Heritage Foundation simulations show that it would
increase the cost of gasoline by $1.10 a gallon. The average
household cost of heating oil would rise 29 percent, while the
average household's electricity bill would jump 53 percent.
These higher costs would significantly hurt American workers and
consumers. The higher energy prices mean that American families
would have less money to spend on everything else. Lieberman-Warner
would reduce GDP by $207 billion a year by 2018. The legislation
would reduce a family of four's disposable personal income by
$1,169 over that same time period. It would increase the annual
inflation rate by 0.7 percentage point a year. This is exactly the
wrong time for Congress to place these burdens on the economy.
Advocates of Lieberman-Warner claim that the legislation will
create "green collar" jobs in the renewable energy sector. The
legislation creates "green collar" jobs only because it requires
investment in expensive and inefficient energy technologies, the
costs of which are passed on to consumers as higher energy prices.
This leaves less money for consumers to spend in other industries.
Throughout the whole economy Lieberman-Warner costs 766,000 jobs by
2018. Calling for Congress to pass Lieberman-Warner to create
"green collar" jobs is like claiming that recessions are beneficial
because they create high paying jobs for bankruptcy lawyers.
This is not a good employment report since 49,000 workers lost
their jobs. However, this report is still not indicative of an
economy in a recession. There is no large spike in the number of
workers laid off by their employers. Instead, the unemployment
rate's increase was mostly driven by a large number of teenagers
entering the labor market and the overall increase in the labor
force. More worrying than this month's report is the current
congressional debate over the Lieberman-Warner bill. This bill
would impose a large cost to the economy and greatly decrease
employment in the United States.
Rea S. Hederman, Jr.,
is Assistant Director of and a Senior Policy Analyst in the Center
for Data Analysis at The Heritage Foundation. James Sherk is Bradley
Fellow in Labor Policy in the Center for Data Analysis.