Wednesday, November 24, 2010

Unemployment Rate: Indicator of Economic Activity?

“New claims for jobless benefits last week dropped to their lowest level in more than two years while consumer spending rose in October, pointing to a moderate strengthening in economic activity.”
The problem with using the headline unemployment rate is that it doesn’t give an accurate picture of the labor market itself, ie., it says nothing about the actual dollar size of the labor market and its contribution to the economy. 
This gives you the approximate number of how many people are employed, and what their weekly earnings are, in order to arrive at the dollar value of the labor market.  3rd quarter 2009 total employed was 99.125 million people, paid an average of $741/week ($38,532 per year) for a total value of $3.819 trillion dollars.  3rd quarter 2010 total employed was 100.291 million people, paid $745/week, or $38,740 per year, for a total value of $3.885 trillion dollars.  The labor market value increased $6.6 billion dollars over the course of a year, a 1.7% increase in value.  
The big thing to take away from this is that the Dow Jones industrials have increased 11.8% over that same period, indicating that the correlation between the labor market and the stock market (another often used indicator of economic activity) is fairly weak. 

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