Unemployment
In economics, a person who is able and willing to work, given the prevailing wage, yet is unable to find a job is considered unemployed. The unemployment rate measures the number of unemployed workers as a proportion of the total labor force, where the latter includes both the unemployed and those with jobs.
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2 Causes and Types of unemployment 3 Measuring unemployment 4 Aiding the Unemployed 5 See also |
Because of the adverse impact of unemployment on society, understanding the forces that create unemployment, and then trying to minimise it, is a central issue in economics. Joblessness makes job-seekers miserable. Lacking a job often means lacking social contact with fellow employees, lacking a purpose for many hours of the day, and of course, lacking the ability to pay bills and to purchase the necessities of life.(This last is especially serious for those with family obligations, debts, and/or medical costs.) Dr. M. Harvey Brenner, among others, has shown that increasing unemployment raises the crime rate, the suicide rate, and encourages bad health. (See his [http://ashleymac.econ.vt.edu/ashley/3204/brenner.pdf ÃÂÃÂInfluence of the Social Environment
on Psychology: The Historical Perspective,ÃÂÃÂ in Stress and Mental
Disorder, ed. James E. Barrett (NY: Raven University Press,
1979)].)
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. This can spur psychological anxiety, weaken labor unions, encourage protectionism (either against "outsiders" who want jobs or foreign competitors), and/or encourage greater work-effort and lower wage demands.
Finally, high unemployment implies low 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. Most unemployment thus represents a profound form of inefficiency. Okun's Law tells us that for the U.S., the economy misses out on about 2 percent of its potential output for each one percentage point of unemployment above the "full employment" unemployment rate or NAIRU (see below).
Open unemployment of the sort defined above is associated with capitalist economies. Preliterate ("primitive") communities treat their members as if they were part 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 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. In other societies, slave-owners never let their property be unemployed for long. (If anything, they would sell the unneeded laborer.) Planned economies such as the old Soviet Union (or today's Cuba) typically provide occupation for everyone, using substantial overstaffing if necessary. 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 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. 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 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.
There is considerable debate amongst economists as to what the main causes of unemployment are. Keynesian economics suggests that unemployment can be explained by insufficient effective demand for goods in the economy. Others point to structural problems (inefficiencies) inherent in labor markets. 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. Yet others see unemployment as largely voluntary for the unemployed. On the other extreme, Marxists see unemployment as a structural fact helping to preserve capitalism and profitability. As seen below, the different perspectives may be right in different ways. They can contribute to our understanding of different types of unemployment.
In theory, there are five major kinds of unemployment. Real-world unemployment may combine different types, while all five might exist at one time. The magnitude of each of these is difficult to measure at any one time.
1. Cyclical unemployment. This is unemployment that exists due to inadequate effective aggregate demand. Gross domestic product is not as high as potential output because of demand failure, due to (say) pessimistic business expectations which discourages private fixed investment spending. In this case, the number of unemployed workers exceeds the number of job vacancies, so that if even all open jobs were filled, some workers would remain unemployed. This the kind of unemployment coincides with unused industrial capacity (unemployed capital goods) and is emphasized by Keynesian economists. They see it as possibly being solved by deficit spending or expansionary monetary policy.
2. Frictional unemployment. This unemployment involves people being temporarily between jobs, searching for new ones. (It is sometimes called search unemployment and is seen as largely voluntary.) It arises because either employers fire workers or workers quit, usually because the individual characteristics of the workers do not fit the individual characteristics of the job (including matters of the employer's personal taste or the employee's inadequate work effort). Some employers -- such as fast-food restaurants -- use management strategies that rely on rapid turnover of employees, so that frictional unemployment is normal. This type of unemployment coincides with an equal number of vacancies and cannot be solved using aggregate demand stimulation. The best way to lower this kind of unemployment is to provide more and better information to job-seekers and employers, perhaps through job-banks in centralized computers (as in some places in Europe). In theory, an economy could also be shifted away from emphasizing jobs that have high turnover, perhaps using tax incentives. But some frictional unemployment is beneficial, since it allows workers to get the jobs that fit their wants best and the employers to find employees who promote profit goals the most. It is a small percentage of the unemployment, however, since workers can often search for new jobs while employed.
3. Structural unemployment. This involves a mismatch between the workers looking for jobs and the vacancies available. Even though the number of vacancies may be equal to the number of the unemployed, the unemployed workers lack the skills needed for the jobs -- or are in the wrong part of the country or world to take the jobs offered. That is, it is very expensive to unite the workers with jobs. Structural unemployment is a result of the dynamic changes of a capitalist economy (such as technological change and capital flight) -- and the fact that labor markets are never as fluid as (say) financial markets. Workers are "left behind" due to costs of training and moving (e.g., the cost of selling one's house in a depressed local economy), plus inefficiencies in the labor markets, such as racial discrimination. Structural unemployment is hard to separate theoretically from frictional unemployment, except to say that it lasts longer. It is also more painful, encouraging the vicious cycle of poverty. As with frictional unemployment, simple demand-side stimulus will not work to easily abolish this type of unemployment. Some sort of direct attack on the problems of the labor market -- such as training programs, mobility subsidies, or anti-discrimination policies -- seems needed. These policies may be reinforced by the maintenance of high aggregate demand, so that the two types of policy are complementary.
Much technological unemployment (e.g. due to robots) might be counted as structural unemployment. Alternatively, technological unemployment might refer to the way in which increases in labor productivity mean that fewer workers are needed to produce the same level of output every year. The fact that aggregate demand can be raised to deal with this problem suggests that this problem is one of cyclical unemployment. As indicated by Okun's Law, the demand side must grow sufficiently quickly to absorb not only the growing labor force but also the workers made redundant by increased labor productivity. Otherwise, we see a jobless recovery such as those seen in the United States in both the early 1990s and the early 2000s.
Seasonal unemployment might be seen as a form of structural unemployment, since it is a type of unemployment that is linked to certain kinds of jobs (construction work, migratory farm work). Most official unemployment measures erase the role of this kind of unemployment by seasonal adjustment.
4. Classical unemployment. In this case, like that of cyclical unemployment, the number of job-seekers exceeds the number of vacancies. However, the problem here is not aggregage demand failure but is instead that real wages are too high relative to the market-equilibrium wage. In simple terms, institutions such as the minimum wage keep wages so high that employers do not want to hire all of the available workers because the cost would exceed the technologically-determined benefit of hiring them (the marginal product of labor). The cure for this type of unemployment involves increasing the flexibility of wages, for example by abolishing minimum wages and labor unions, etc. Following this tradition Professor Kim Swales of the University of Strathclyde has considered a Pigovian approach to helping unemployment that involves tax breaks on the value-added tax [1] [1].
5. Marxian unemployment. As Karl Marx noted (and Michal Kalecki emphasized), a certain amount of unemployment is normally needed in order to maintain work discipline in jobs, to keep wages down, and to protect business profitability. If profitability suffers a sustained depression, capitalists can and will punish people by imposing a recession via their control over investment decisions (a capital strike). To Marxists, this kind of unemployment cannot be abolished without abolishing capitalism as an economic system (or running capitalism using a fascist state). Like cyclical unemployment, it corresponds to production below potential output and to unemployed capital goods. As with cyclical and classical unemployment, unemployment exceeds the availability of vacancies. However, simple demand stimulus in the face of a capital strike simply encourages inflation: if profits are being squeezed, the only way to maintain high production is via rising prices.
In theory, it is possible to abolish cyclical unemployment by increasing the aggregate demand for products and workers. However, eventually the economy hits an "inflation barrier" imposed by the four other (supply-side) kinds of unemployment (to the extent that they exist). Some economists posit the existence of a natural rate of unemployment or a NAIRU at full employment, which means that if the unemployment rate gets too low inflation will get worse and worse (accelerate) in the absence of wage and price controls. Others simply see the possibility of inflation rising as the unemployment rate falls. This is the famous Phillips curve.
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.
Typically, the labor force includes only work done for economic gain.
Hence, a housewife is neither part of the labor force nor unemployed. Nor are full-type students nor prisoners considered to be part of the labor force or unemployment.
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. A worker who has left the labor force, but would in fact like to work (a "discouraged worker"), is an example of hidden unemployment.
The unemployment figures indicate how many are not working for pay but seeking employment. It need not say anything about how many are actually not working at all or working without pay. Also, 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 as these methods do not take into account:
Different countries have different ways of measuring unemployment, making comparissons difficult. For instance Canada's unemployment rate is traditionally several percentage points higher than that of the United States, but this is mostly due to the different methods of measurment.
Due to these deficiencies, many labour market economists prefer to look at a range of economic statistics such as:
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 unemployment statistics monthly.
One is the Current Population Survey (CPS) [1] which surveys 60,000 households. The other
is the Current Employment Statistics (CES) [1] 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.
Most developed countries have aids for the unemployed as part of the welfare state. These include unemployment insurance, welfare, and subsidies to aid in retraining.Implications
Causes and Types of unemployment
Measuring unemployment
In some countries, the availability of unemployment benefits can alter statistics since they give an incentive to register as unemployed. However, in the United States this is not a problem, since unemployment is measured using a sample survey (akin to a Gallup poll). 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 employment survey of employers to get a better estimate of the number of jobs created or destroyed. In the United States
Aiding the Unemployed