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Unemployment

From Academic Kids

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Lange-MigrantMother02.jpg
Dorothea Lange's Migrant Mother depicts destitute pea pickers in California during the Great Depression. The Great Depression caused a massive surge of cyclical unemployment. This was associated with greater misery for those who could find jobs.

In economics, a person who is able and willing to work yet is unable to find a paying job is considered unemployed. The unemployment rate is the number of unemployed workers divided by the total civilian labor force, which includes both the unemployed and those with jobs (all those willing and able to work for pay). In practice, measuring the number of unemployed workers actually seeking work is notoriously difficult. There are several different methods for measuring the number of unemployed workers. Each method has its own biases and the different systems make comparing unemployment statistics between countries, especially those with different systems, difficult.

The graph shows the official unemployment rate (as a percentage of the labor force) in the United States from 1948 to the present (using data supplied by the Bureau of Labor Statistics). The terms unemployment and unemployed are sometimes used to refer to other inputs to production that are not being fully used -- for example, unemployed capital goods.

Contents

Impact on society and the economy

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Unemployment rates in the United States.

Some of the likely costs of unemployment for society include increased poverty, crime, political instability, mental health problems, and diminished health standards. Understanding the forces that create unemployment, and then trying to mitigate their negative effects to the greatest extent possible, is a central issue in economics.

Costs

Joblessness can hit individual job-seekers hard. Lacking a job often means lacking social contact with fellow employees, a purpose for many hours of the day, and of course, the ability to pay bills and to purchase both necessities and luxuries. This last is especially serious for those with family obligations, debts, and/or medical costs, especially in a country such as the U.S., where the availability of health insurance is often linked to holding a job. Dr. M. Harvey Brenner, among others, has shown that increasing unemployment raises the crime rate, the suicide rate, and encourages bad health.[1] (http://ashleymac.econ.vt.edu/ashley/3204/brenner.pdf) Because unemployment insurance in the U.S. typically does not even replace 50 percent of the income one received on the job (and one cannot receive it forever), the unemployed often end up tapping welfare programs such as Food Stamps — or accumulating debt, both formal debt to banks and informal debt to friends and relatives.

Some hold that many of the low-income jobs (such as McJobs) aren't really a better option than unemployment with a welfare state (with its unemployment insurance benefits). But since it is difficult or impossible to get unemployment insurance benefits without having worked in the past, these jobs and unemployment are more complementary than they are substitutes. (These jobs are often held short-term, either by students or by those trying to gain experience; turnover in most McJobs is high, in excess of 30%/year.) Unemployment insurance keeps an available supply of workers for the McJobs, while the employers' choice of management techniques (low wages and benefits, few chances for advancement) is made with the existence of unemployment insurance in mind. This combination promotes the existence of one kind of unemployment, frictional unemployment.

Another cost for the unemployed is that the combination of unemployment, lack of financial resources, and social responsibilities may push unemployed workers to take jobs that do not fit their skills or allow them to use their talents. That is, unemployment can cause underemployment (definition 1). This is one of the economic arguments in favor of having unemployment insurance.

Second, unemployment makes the employed workers more insecure in their jobs, worrying about being replaced, as Alan Greenspan of the U.S. Federal Reserve has suggested.[2] (http://www.federalreserve.gov/boarddocs/hh/1998/july/testimony.htm), [3] (http://www.federalreserve.gov/BOARDDOCS/TESTIMONY/1999/19990617.htm), [4] (http://www.federalreserve.gov/BOARDDOCS/TESTIMONY/1999/19990617.htm). This feared cost of job loss can spur psychological anxiety, weaken labor unions and their members' sense of solidarity, encourage greater work-effort and lower wage demands, and/or abet protectionism. This last means efforts to preserve existing jobs (of the "insiders") via barriers to entry against "outsiders" who want jobs, legal obstacles to immigration, and/or tariffs and similar trade barriers against foreign competitors. The impact of unemployment on the employed is related to the idea of Marxian unemployment. Finally, the existence of significant unemployment raises the monopsony power of one's employer: that raises the cost of quitting one's job and lowers the probability of finding a new source of livelihood.

Finally, high unemployment implies low real Gross Domestic Product: we are not using our resources as completely as possible and are thus wasting our opportunities to produce goods and services that allow people to survive and to enjoy life. Much unemployment — called deficient-demand or cyclical unemployment — thus represents a profound form of inefficiency, sometimes called "Keynesian inefficiency." (However, this loss of production might instead be caused by classical unemployment or Marxian unemployment, which reduce potential output by restricting supply.) Okun's Law tells us that for the U.S., the economy misses out on about two percent of its potential output for each one percentage point of unemployment above the "full employment" unemployment rate or NAIRU (see below). Alternatively, this "law" says that as unemployment rises by one percentage point, say from 5% to 6% of the civilian labor force, the percentage of potential output that could have been produced but was not rises by about two points.

Benefits

Benefits for the entire economy arising from unemployment include that it keeps inflation from being high, following the Phillips curve, or from accelerating, following the NAIRU/natural rate of unemployment theory. Relatedly, a small amount of frictional unemployment allows employers to find the employees most suited to the jobs offered, while allowing workers to find the jobs that better fit their tastes, talents, and needs. This amount may be very small, however, since it is relatively easy to seek a new job without losing one's current one.

As in the Marxian theory of unemployment, special interests may also benefit: employers often like having their employees in fear of losing their jobs, and thus working hard, keeping their wage demands low, etc. As noted, unemployment may increase employers' monopsony power. Unemployment may thus promote labor productivity and profitability.

Some say that slow economic growth and the resulting unemployment are actually good, since the constantly needed growth of the GDP cannot be sustained forever, given resource constraints and environmental impacts. But others ask if is it fair to burden the unemployed (usually those at the bottom of the economic heap) with the costs of limiting the use of resources and the abuse of the environment. This suggests that we should seek ways to improve the efficiency of our resource management and environmental stewardship to attain growth and low unemployment in order to make sure that the burdens are distributed fairly.

Causes of Unemployment

Capitalism and Unemployment

Open unemployment of the sort defined above is associated with capitalist economies. Preliterate ("primitive") communities treat their members as parts of an extended family and thus do not allow them to be unemployed — in the effort to preserve the group. In precapitalist societies such as European feudalism, the serfs (though clearly dominated and exploited by the lords) were never "unemployed" because they had direct access to the land (and the needed tools) and could thus work to produce crops. Just as on the American frontier during the 19th century, there were day laborers and subsistence farmers on poor land, whose position in society was somewhat analogous to the unemployed of today. But they were not truly unemployed, since they could find work and support themselves on the land.

Under both ancient and modern systems of slave-labor, slave-owners never let their property be unemployed for long. (If anything, they would sell the unneeded laborer.) Planned economies (often called "communist countries") such as the old Soviet Union or today's Cuba typically provide occupation for everyone, using substantial overstaffing if necessary. (This is called "hidden unemployment," which is sometimes seen as a kind of underemployment, definition 3.) Workers' cooperatives — such as those producing plywood in the U.S. Pacific Northwest — do not let their members become unemployed unless the co-op itself goes bankrupt.

On the other hand, under capitalism the individual profit-seeking employer does not have to bear the complete social costs of laying off or firing workers, so they are willing to live with (or even profit from) the existence of unemployment — unless employees are able to win good severance packages or protection from the government (such as restrictions on firing and lay-offs). (That is, there is a market failure due to the existence of external costs of firing or laying-off of people.) On the "supply side," workers' lack of significantly positive net worth (beyond equity in a home or a car) makes it very difficult for them to go into business for themselves to avoid unemployment. Economist Edward Wolff (http://www.econ.nyu.edu/user/wolffe/) estimates that in 1995 in the U.S., families with adults aged 25-45 in the middle income quintile could sustain their current consumption for only 1.2 months (or live at 125% of the poverty standard for 1.8 months) based on their financial reserves. Poorer quintiles of course had more difficulty.

Because not all unemployment may be "open" and counted by government agencies, official unemployment may be very low even under capitalism. Most poorer capitalist countries lack a modern welfare state and unemployment insurance so that it is very difficult to afford being unemployed for very long: they often end up taking jobs below their skill levels. Those who might be counted as "unemployed" in the rich countries end up instead being underemployed (definition 1) and not counted.

Debate on Unemployment

There is considerable debate amongst economists as to what the main causes of unemployment are. Keynesian economics emphasizes unemployment resulting from insufficient effective demand for goods and service in the economy (cyclical unemployment). Others point to structural problems (inefficiencies) inherent in labor markets (structural unemployment). Classical or neoclassical economics tends to reject these explanations, and focuses more on rigidities imposed on the labour market from the outside, such as minimum wage laws, taxes, and other regulations that may discourage the hiring of workers (classical unemployment). Yet others see unemployment as largely due to voluntary choices by the unemployed (frictional unemployment). On the other extreme, Marxists see unemployment as a structural fact helping to preserve business profitability and capitalism (Marxian unemployment). The different perspectives may be right in different ways, contributing to our understanding of different types of unemployment.

Though there have been several definitions of voluntary (and involuntary) unemployment in the economics literature, a simple distinction is often applied. Voluntary unemployment is blamed on the individual unemployed workers (and their decisions), whereas involuntary unemployment exists because of the socio-economic environment (including the market structure and the level of aggregate demand) in which individuals operate. (As is usual in economics, the sociological or social-psychological factors that help determine individual choices are ignored here.) In these terms, much or most of frictional unemployment is voluntary, since it reflects individual search behavior. On the other hand, cyclical unemployment, structural unemployment, classical unemployment, and Marxian unemployment are largely involuntary in nature. However, the existence of structural unemployment may reflect choices made by the unemployed in the past, while classical unemployment may result from the legislative and economic choices made by labor unions and/or political parties aiming to help workers. So in practice, the distinction between voluntary and involuntary unemployment is hard to draw. The clearest cases of involuntary unemployment are those where there are fewer job vacancies than unemployed workers even when wages are allowed to adjust, so that even if all vacancies were to be filled, there would be unemployed workers. This is the case of cyclical unemployment and Marxian unemployment, for which macroeconomic forces lead to microeconomic unemployment. For more details, see unemployment types.

One of the main causes of unemployment in a free market economy is the fact that the law of supply and demand is not really applied to the price to be paid for employing people. In situations of falling demand for products & services the wages of all employees (from President to Errand Boy) are not automatically reduced by the required percentage to make the business viable. Instead whole groups of persons are laid off, with all the consequent social hardships. In the classical framework, such unemployment is due to the existing legal framework, along with "interferences" with the market by non-market institutions such as labor unions and government. On the other hand, for Keynes, Marx, and many others, many of the problems with market adjustment arise from the market itself (Keynes) or from the nature of capitalism (Marx).

Types of Unemployment

  • Cyclical (Deficient Demand) unemployment: When there is not enough aggregate demand for the labour.
  • Frictional: When moving from one job to another, the unemployment temporarily experienced when looking for a new job.
  • Structural: Experienced when the structure of an industry or skill demands changes in mainly:
    • switching from a declining industry to a rapidly growing one.
    • Pace of change in the tastes of people.
    • Regional Structure of industry.
  • Technological: Caused by the replacement of workers by machines or other advanced technology.
  • Classical (Real-wage): When real wage for a job are set above the market-clearing level, commonly government (as with the minimum wage) or unions.
  • Marxian: when unemployment is needed to motivate workers to work hard and to keep wages down, to preserve profitability.
  • Seasonal: When an industry only is in demand certain times. For example, ski slopes, Shopping Mall Santas.

For a more detailed discussion, see the entry on types of unemployment.

Measuring unemployment

The U.S. Bureau of Labor Statistics (BLS) provides some definitions which are similar to, but not the same as, those of other countries.

BLS definitions

The BLS counts employment and unemployment (of those over 16 years of age) using a sample survey of households.[5] (http://www.bls.gov/cps/cps_faq.htm) In BLS definitions, people are considered employed if they did any work at all for pay or profit during the survey week. This includes not only regular full-time year-round employment but also all part-time and temporary work. Workers are also counted as "employed" if they have a job at which they did not work during the survey week because they were:

  • On vacation;
  • Ill;
  • Taking care of some other family or personal obligation (for example, due to child-care problems);
  • On maternity or paternity leave;
  • Involved in an industrial dispute (strike or lock-out); or
  • Prevented from working by bad weather.

Typically, employment and the labor force include only work done for economic gain. Hence, a homemaker is neither part of the labor force nor unemployed. Nor are full-time students nor prisoners considered to be part of the labor force or unemployment. The latter can be important. In 1999, economists Lawrence F. Katz and Alan B. Krueger estimated that increased incarceration lowered measured unemployment in the United States by 0.17 percentage points between 1985 and the late 1990s. In particular, as of this writing (2004) 3 percent of the US population is incarcerated.

On the other hand, individuals are classified as "unemployed" if they do not have a job, have actively looked for work in the prior four weeks, and are currently available for work. The unemployed includes all individuals who were not working for pay but were waiting to be called back to a job from which they had been temporarily laid off.

Finally, it is possible to be neither employed nor unemployed by BLS definitions, i.e., to be outside of the "labor force." These are people who have no job and are not looking for one. Many of these are going to school or are retired. Family responsibilities keep others out of the labor force. Still others have a physical or mental disability which prevents them from participating in labor force activities.

Children, the elderly, and some individuals with disabilities are typically not counted as part of the labor force in and are correspondingly not included in the unemployment statistics. However, some elderly and many disabled individuals are active in the labor market.

In the early stages of an economic boom, both employment and unemployment often rise. This is because people join the labor market (give up studying, start a job hunt, etc.) because of the improving job market, but until they have actually found a position they are counted as unemployed. Similarly, during a recession, the increase in the unemployment rate is moderated by people leaving the labor force.

The accuracy of unemployment statistics

The unemployment rate may be different from the impact of the economy on people. First, the unemployment figures indicate how many are not working for pay but seeking employment for pay. It is only indirectly connected with the number of people who are actually not working at all or working without pay. Second, in the United States those who work as little as one hour a week for payment are considered employed, even if they wish to work more. Therefore, critics believe that current methods of measuring unemployment are inaccurate in terms of the impact of unemployment on people as these methods do not take into account:

  • Those who have lost their jobs and have become discouraged over time from actively looking for work.
  • Those who are self-employed or wish to become self-employed, such as tradesmen or building contractors or IT consultants........
  • Those who have retired before the official retirement age but would still like to work.
  • Those on disability pensions who, while not possessing full health, still wish to work in occupations suitable for their medical conditions.
  • Those who work for payment for as little as one hour per week but would like to work full-time. These people are "involuntary part-time" workers.
  • Those who are underemployed, e.g., a computer programmer who is working in a retail store until he can find a permanent job.

On the other hand, the measures of unemployment may be "too high." In some countries, the availability of unemployment benefits can inflate statistics since they give an incentive to register as unemployed. Homemakers and other people who do not really seek work may choose to declare themselves unemployed so as to get benefits; people with undeclared paid occupations may try to get unemployment benefits in addition to the money they earn from their work. Conversely, the absence of any tangible benefit for registering as unemployed discourages people from registering.

However, in the United States and several other countries this is not a problem, since unemployment is measured using a sample survey (akin to a Gallup poll). This method is also used by many countries besides the U.S., including Canada, Mexico, Australia, Japan, and all of the countries in the European Economic Community. According to the BLS, a number of Eastern European nations have instituted labor force surveys as well.

The sample survey has its own problems, because the total number of workers in the economy is based on guesses rather than a census. So many economists look to the survey of employers (http://www.bls.gov/ces) to get a better estimate of the number of jobs created or destroyed.

Due to these deficiencies, many labor market economists prefer to look at a range of economic statistics such as:

  • Labour market participation rate (the percentage of people aged between 15 and 64 who are currently employed or searching for employment)
  • The total number of full-time jobs in an economy
  • The number of people seeking work as a raw number and not a percentage
  • The total number of person-hours worked in a month compared to the total number of person-hours people would like to work

Situation in the United States

There are two permanent government projects conducted by the United States Census Bureau and or the Bureau of Labor Statistics for the United States Department of Labor that gather employment statistics monthly. One is the Current Population Survey (CPS) [6] (http://www.bls.gov/cps) which surveys 60,000 households: it is used in calculating the unemployment rate. The other is the Current Employment Statistics (CES) [7] (http://www.bls.gov/ces) which surveys 300,000 employers.

These two sources have different classification criteria, and usually produce differing results. As noted, most economists these days see the CES as a more accurate estimate of the state of the job market.

Though many people care about the number of unemployed (8.0 million in the U.S. in December 2004), economists typically focus on the unemployment rate (5.4 percent). This corrects for the normal increase in the number of people working for pay or seeking work due to population increases and increases in the paid labor force relative to the population — and thus the normal increase in the number of unemployed workers.

It is important to note that these statistics are for the U.S. economy as a whole, hiding variations among groups. For December 2004 in the U.S., the unemployment rates for the major worker groups were as follows:

  • adult men: 4.9 percent;
  • adult women: 4.7 percent;
  • whites: 4.6 percent;
  • Asians: 4.1 percent.
  • Hispanics or Latinos: 6.6 percent;
  • blacks: 10.8 percent;
  • teenagers: 17.6 percent;

These percentages represent the usual rough ranking of these different groups' unemployment rates, though the absolute numbers normally change over time with the business cycle. They come from the Bureau of Labor Statistics (http://www.bls.gov/news.release/pdf/empsit.pdf). (Clicking on this link will lead to a pdf file with up-to-date numbers.)

Aiding the Unemployed

Most developed countries have aids for the unemployed as part of the welfare state. These unemployment benefits include unemployment insurance, welfare, and subsidies to aid in retraining. To calculate the unemployment insurance benefits you might receive in the United States, see the useful page at the Economic Policy Institute (http://www.epinet.org/content.cfm/datazone_uicalc_index).

Of course, unemployment insurance and similar programs have replaced other systems (support from community and churches, home gardening and other production) which played a similar role in the past.

See also

External links

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