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Unemployment
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Unemployment

In economics, a person who is able and willing to work 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 civilian labor force, where the latter 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 really seeking work is notoriously difficult, each method having its own biases; this makes comparing unemployment statistics between countries difficult.

Table of contents
1 Impact on society and the economy
2 Causes of Unemployment
3 Types of Unemployment
4 Measuring unemployment
5 Situation in the United States
6 Aiding the Unemployed
7 See also
8 External Links

Impact on society and the economy

Some of the likely costs of unemployment for society include increased poverty, crime, and diminishing health standards. Because of this, understanding the forces that create unemployment, and then trying to reduce it (or its negative effects) as much as 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 the necessities of life. (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] 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.(To calculate the unemployment insurance benefits you might receive in the United States, see the useful page at the Economic Policy Institute).

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. 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 discussed below.

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. 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 discussed below.

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. As in the theory of Marxian 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. 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.

In other societies, 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 external costs of laying people off or firing them.) 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.

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 voluntary for the unemployed (frictional unemployment). On the other extreme, Marxists see unemployment as a structural fact helping to preserve capitalism and business profitability (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 applied here. 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) 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 labor parties. 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, so that even if all vacances were to be filled, there would be unemployed workers.

Types of Unemployment

In theory, there are the five major kinds of unemployment mentioned in the previous paragraph. 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, partly because they overlap and are thus hard to separate from each other. All but cyclical unemployment can be seen as existing at full employment, the level of employment and unemployment that represents the inflation barrier to demand-side growth.

Cyclical unemployment

This type of unemployment exists due to inadequate effective aggregate demand; it gets its name because it varies with the business cycle. 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. Low government spending or high taxes, underconsumption, or low exports net of imports may also have this result.

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). Keynesian economists see it as possibly being solved by government deficit spending or by expansionary monetary policy, which aims to increase non-governmental spending by lowering interest rates.

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 and other providers of McJobs -- 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 by using tax incentives or worker-training programs.

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. Similarly, employers can seek new employees before firing current ones.

One kind of frictional unemployment is called wait unemployment: it refers to the effects of the existence of some sectors where employed workers are paid more than the market-clearing equilibrium wage. Not only does this restrict the amount of employment in the high-wage sector, but it attracts workers from other sectors who wait to try to get jobs there. The main problem with this theory is that such workers will likely "wait" while having jobs, so that they are not counted as unemployed. In Hollywood, for example, those who are waiting for acting jobs also wait on tables in restaurants for pay (while acting in "Equity Waiver" plays at night for no pay). However, these workers might be seen as underemployed (definition 1).

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 can never be 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 empirically from frictional unemployment, except to say that it lasts longer. It is also more painful, encouraging people to fall into 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 required. These policies may be reinforced by the maintenance of high aggregate demand, so that the two types of policy are complementary.

Structural unemployment may also be ecouraged to rise by persistent cyclical unemployment: if an economy suffers from long-lasting low aggregate demand, it means that many of the unemployed become disheartened, while finding their skills (including job-searching skills) become "rusty" and obsolete. Problems with debt may lead to homelessness and a fall into the vicious circle of poverty. This means that they may fit the job vacancies that are created when the economy recovers. Some economists see this scenario as occurring under British Prime Minister Margaret Thatcher during the 1970s and 1980s. The implication is that sustained high demand may lower structural unemployment. However, it also may encourage inflation, so some kind of incomes policies (wage and price controls) may be needed, along with the kind of labor-market policies mentioned in the previous paragraph. (This theory of rising structural unemployment has been referred to as an example of path dependence or "hysteresis.")

Much technological unemployment (e.g. due to the replacement of workers by robots) might be counted as structural unemployment. Alternatively, technological unemployment might refer to the way in which steady 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 this kind of unemployment from the statistics using "seasonal adjustment."

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 instead the fact 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, labor unions, and the like, trying to make the labor market more like a financial market. 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].

Marxian unemployment

As Karl Marx noted (and Michal Kalecki emphasized), a certain amount of unemployment -- the reserve army of the unemployed -- is normally needed in order to maintain work discipline in jobs, keep wages down, and 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 the Marxian school, these strikes are rare, since in normal times the government, responding to pressure from their most important constituencies, will encourage recessions before profits are hurt.

To Marxists, this kind of unemployment cannot be abolished without overthrowing capitalism as an economic system and replacing it with democratic socialism -- or running capitalism using a fascist state, under which profitability is protected by the direct use of force.

As with cyclical and classical unemployment, with Marxian unemployment, the number of jobless exceeds the availability of vacancies. (It's the scarcity of jobs that gives unemployment such a motivational effect.) However, simple demand stimulus in the face of a capital strike (refusal to invest) simply encourages inflation: if profits are being squeezed, the only way to maintain high production is via rising prices.

Full Employment.

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 (incomes policies). Others simply see the possibility of inflation rising as the unemployment rate falls. This is the famous Phillips curve.

Another, normative, definition of full employment might be called the ideal unemployment rate. It would exclude all types of unemployment that represent forms of inefficiency. This type of "full employment" unemployment would correspond to only frictional unemployment (excluding that part encouraging the McJobs management strategy) and would thus be very low. However, it would be impossible to attain this full-employment target using only demand-side Keynesian stimulus without getting below the NAIRU and suffering from accelerating inflation (absent incomes policies). Trainings programs aimed at fighting structural unemployment would help here.

One of the major problems with the NAIRU theory is that no-one knows exactly what the NAIRU is. The margin of error can be quite high relative to the actual unemployment rate, making it hard to use the NAIRU in policy.

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.[1] 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 alos all part-time and temporary work. Workers also are counted as "employed" if they have a job at which they did not work during the survey week because they were:

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.

On the other hand, individuals are classified as "unemployed" if they do not have a job, have actively looked for work in the prior 4 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., 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:

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 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:

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 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.

Though many people care about the number of unemployed (8.2 million in the U.S. in April 2004), economists typically focus on the unemployment rate (5.6 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's important to note that these statistics are averages for the entire U.S. economy, hiding variations among groups. For April 2004 in the U.S., the unemployment rates for the major worker groups were as follows:

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. (Clicking on this link will give up-to-date numbers.)

Aiding the Unemployed

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. 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