UNEMPLOYMENT

Although often defined in a variety of ways, a person is defined an unemployed if they are deemed able and willing to work, but are unable to find a paying job. The unemployment rate therefore is the number of unemployed workers divided by the total civilian workforce.

In practice however, actually measuring the number of unemployed people looking for work is less than easy, which is why several different ways for measuring unemployment levels have been devised. However, each method has certain advantages and disadvantages, which means that comparing rates of unemployment across different countries can be very difficult.

What cannot be disputed however are the various economic and social effects of unemployment, which include higher incidences of crime, poverty and political turmoil on a social level, as well as lower physical and mental health on personal levels. Therefore, understanding the causes of unemployment, and then implementing policies designed to offset the negative impacts of joblessness represents a central theme in economics.

COSTS

Unemployment can affect individual job seekers very hard, resulting in lack of social contact with other workers, loss of daily routine, diminished self-esteem, physical and mental illness, together with the obvious economic drawbacks. Research conducted by Dr M Brenner and others has also shown that higher levels of joblessness also raises national crime and suicide levels, as well as encourage bad health.

These costs are especially acute in countries such as the US, where access to health care is often dependent on whether the patient is employed. Also, since US unemployment insurance is typically less than 50% of a worker’s former income, a high proportion of the unemployed will either lead to increased strain on public welfare services, or accumulating debt both from formal sources such as banks, or informal sources such as family and friends.

Many economists also agree that many low-income jobs (referred to as McJobs since many of them involved working in fast-food restaurants) don’t provide a much better alternative to state welfare anyway. However, since receiving unemployment and insurance benefits are largely dependent on having worked in the past, these types of jobs are actually seen more as complements to unemployment rather than substitutes. For this reason, it’s perhaps unsurprising that these jobs are usually held short-term by students or those trying to gain work experience for example, leading to employee turnover rates of over 30% in some cases.

These same economists also argue that the existence of inadequate unemployment maintains a ready source of workers for these so-called McJobs, which allows employers to offer lower wages, benefits and opportunities for promotion. This, they say, is instrumental in the creation of another form of joblessness known as Frictional Unemployment, where job-seekers routinely go from one low-paid job to another in short succession.

Yet another negative consequence is that the combination of unemployment, lack of money, and high levels of social responsibility may force jobseekers to accept roles that they are overqualified for, leading to a situation where unemployment leads to underemployment. This is commonly cited as being one of the principles reasons for the provision of unemployment insurance. Underemployment may also lead to fears among those workers already employed about being replaced by cheaper new hires.

Despite the clear psychological pressure this can place on existing employees, job insecurity can also lead to weakened labour unions, which may result in greater labour productivity, lower salary demands as well as offset job protectionism – policies designed to preserve existing jobs by the erection of various barriers to entry against outsiders who are looking for work. These can take the form of legal barriers to increased immigration, as well as tariffs or other barriers designed to exclude foreign workers from domestic labour markets.

This ties in with Marxian Unemployment, which deals with the effect of joblessness on those already employed. Finally, a situation of high rates of unemployment may create firms which become sole purchasers of labour known as monopsonies. Such firms would therefore increase the cost of leaving employment, as well as reduce the chances of finding a new source of employment.

Finally, high rates of joblessness imply low rates of economic output and production, since resources are not being utilized at optimum levels of efficiency, thus undermining opportunities to increase economic welfare and benefits for everyone. This is sometimes referred to as Keynesian Inefficiency, which gives rise to this so-called Deficient-Demand or Cyclical Unemployment, since it mirrors the business cycle of economic expansion and contraction. This also forms the backbone of a theory known as Okun’s Law. Postulated by the American economist Arthur Melvin Okun in 1962, Okun’s Law states that for every percentage point increase in unemployment, GDP will roughly fall by two percentage points compared to potential output.

BENEFITS

Although the costs of unemployment are fairly straightforward, some economists argue that joblessness may have some benefits too. One of these benefits include keeping inflation in check (following from the Phillips Curve model explained earlier). Also, a relative small amount of frictional unemployment may generate the level of labour mobility needed to ensure that employers find it easier to find the employees most suited to the roles they have, while allowing employees to find those positions which are most in line with their own particular preferences.

Tying in with Marxian theory, special interest groups may also stand to benefit from higher unemployment, since higher levels of job insecurity may lead to increased worker motivation and productivity – with obvious benefits for employees, who may also be able to offer lower wages and longer hours to take full advantage of their monopsony power.

Some environmental economists even claim that lower economic growth and higher levels of unemployment are actually desirable, since GDP cannot be expected to rise indefinitely given finite resources. However, most people (economists and non-economists alike) would almost certainly deem it unfair for the unemployed (usually the most disadvantaged members of society both economically and socially) to bear the burden of more sustainable but much lower levels of economic growth. Therefore, perhaps the central purpose of economic theory is to discover the ways and means to improve the efficiency of resource management and allocation in a way that distributes the costs of doing so fairly and equitably across all members of society.

CAUSES OF UNEMPLOYMENT

Capitalist economies often are associated with the type of open unemployment as defined previously. Historically, primitive communities were known to treat individuals within the society or tribes are members of an extended family, this eliminating the possibility of unemployment in order to preserve the social integrity of the community. This soon gave way however to the ancient slave labour systems prevalent in Ancient Egypt and Rome, where slave-owners would obviously endeavour to provide as much work for their ‘property’ as possible – or otherwise sell slaves on.

In Feudal societies such as those found throughout Europe during the Middle Ages and in both Russia and the US up until the 19th Century, the common agricultural workers known as ‘Serfs’ were never technically unemployed since they had direct access to both the land and the tools needed to produce crops and thus survive – even though, vast numbers of serfs were exploited by a small number of wealthy landlords who controlled most of the land. In addition to these subsistence farmers were an even lower class of workers known as day laborers who typically followed a nomadic existence travelling in search of temporary work.

At the other end of the spectrum are the so-called Planned or Communist systems of present-day Cuba or Soviet-era Russia, which ensure full-employment by providing work for every single member of society whatever their skills or qualifications. However, this can sometimes generate Hidden Unemployment, a type of underemployment which arises when a job role meant for only person is being performed by more than one individual. A similar variation is the worker’s co-operative, which doesn’t allow any members to become unemployed unless the organization itself becomes bankrupt.

But bringing our focus back to capitalist economies again, it’s clear that the profit-seeking employer does not have to bear the social burdens associated with unemployment, and in fact may even profit from it. Hence the importance of government regulation in ensuring that worker’s right is upheld through the provision for example of adequate unemployment insurance, severance packages and restrictions on how easily an employer can let go of staff in the first place (although it has been argued that the latter may make employers reluctant to hire staff in the first place).

These factors are compounded by the fact that beyond their homes, most workers do not have the equity required to enter into business themselves should they find themselves employed at a level less than their capacity. In 1995, US economist Edward Wolff calculated that US adults between the 25-45 age range in the middle-income quintile had only enough financial resources to survive 1.2 months at their existing level of expenditure in the event of unemployment, with lower quintiles being able to survive for even less time.

However, all forms of unemployment are dependent on the accuracy of the ways in which they are calculated, with governments having obvious incentives to underestimate measures of joblessness across the overall economy. With poorer capitalist economies lacking modern welfares facilities and insurance against the event of workers losing their jobs, unemployment becomes difficult to sustain for very long which forces at least some workers to take positions far below their skill levels – something which would result in these employees not being classed as unemployed despite being significantly underemployed.

DEBATE ON UNEMPLOYMENT

Unemployment, and the causes of unemployment, represents some of the most controversial topics within the entire field of economics, with different schools and economists offering a wide range of possible reasons and theories as to why unemployment occurs, and how best to remedy it.

For example, Keynesian economists blame inadequate aggregate demand across the overall economy for goods and services leading to what is known as Cyclical Unemployment. Other economists however blame fundamental inefficiencies within labour markets themselves which lead to Structural Unemployment. Meanwhile, Classical or Neo-Classical economists debate that such inefficiencies are not inherent to labour markets themselves, but arise because of external factors such as minimum wage laws, taxation, and other public-sector regulations which may undermine incentives to employ workers in the first place, leading to Classical Unemployment.

Following on, other economists regard joblessness as nothing more than a voluntary choice made by workers no longer willing to work for various reasons, generating so-called Frictional Unemployment. At the other extreme, economists leaning to the left on the political spectrum define Marxist Unemployment as a structural component of every capitalist system which arises from every employer’s desire to cut costs and increase profits – even to the detriment of their workforce. However, it would be fair to say that while no one view may be entirely correct, each perspective does serve to enhance our understanding of the myriad causes which may be behind unemployment.

MEASURING UNEMPLOYMENT

As of March 2005, the BLS uses three main sources in information to gather statistics about both the level and extent of employment amongst those aged 16 years and over. These are:

1. Current Population Survey
2. Current Employment Statistics Survey
3. State Unemployment Insurance Claims

Under standard BLS definitions, individuals are classed as employed if they performed any paid work during the week of the survey, including any part-time or temporary work. Individuals are also classed as employed if they did not work during the survey week due to:

• Holidays
• Illness
• Extenuating personal circumstances
• Maternity or Paternity leave
• Industrial actions
• Bad weather

While this may at first seem like a wide measure of employment, the BLS does not count homemakers, full-time students or prisoners – the latter being of particular importance. During the 1990’s, US economists Alan Kreuger and Lawrence Katz calculated that an increase in the prison populating caused unemployment to rise by almost 0.2% from 1985 to the late 1990’s – equal in real terms to approximate a quarter of a million civilian workers.

Conversely, those members of the civilian work force classed as unemployed are those who do not possess paid employment, have actively sought employment during the previous four weeks, and are currently available to work – and includes not working for pay during the week of the survey, but were anticipating being called back to work in a job from which they been laid off on a temporary basis.

Lastly, the BLS defines those neither employed and unemployed as being outside of the labour force, which consists of individuals who neither have a current job, and are not currently seeking one. However, many of these individuals may be in full- or part-time education, or retired, while others may be classed as being outside of the labour force due to onerous family commitments such as providing full-time care and support for an ailing relative – thus preventing them from joining the labour force. Also, children, the aged, and the disabled are not typically counted as forming part of the labour force either – even though some of the elderly and disabled members of society may actually be working.

THE ACCURACY OF UNEMPLOYMENT STATISTICS

Although the rate of unemployment serves as a fairly accurate barometer of the health of the overall economy, there may be instances where some level of discrepancy may occur – mainly due to the fact that the BLS only counts those actually looking for work in contrast to every person who doesn’t have a job. Also, the BLS counts workers as being employed even if they have worked only a single hour during the week of the sample! These and other problems have led some economists to question the accuracy of the statistics collected by the BLS, since they do not include:

• Unemployed workers who have lost their jobs and have become discouraged from seeking further employment over time;
• Individuals who are self-employed or who wish to be self-employed;
• Workers who have retired before the official age of retirement, but who nonetheless wish to work;
• People on disability benefits, but would still be suitable to work in professions which could accommodate their disability;
• Involuntary part-time workers, who technically could work as little as one hour per week even though they would like to work for longer hours;
• The underemployed, namely workers who are currently in positions far below their skill and/or qualification level.

However, other economists argue that traditional measures of unemployment may be too high. For example, a highly generous social welfare system may provide little incentive for individuals to find work if they are able to sustain the same standard of living without doing so courtesy of central government. This may extend also to homemakers and other individuals who while not actively seeking work may nonetheless declare themselves as out of work to receive unemployment benefits – not to mention those people who illegally claim these benefits while being in full-time employment.

In terms of actual ease and accuracy of the information gathered, the use of a sample survey has the advantage of not being reliant on the unemployed registering themselves as such – something which they may have no incentive to do, and explains why several countries such as Canada, Mexico and Japan as well as the US use this form of Gallup poll. However, one disadvantage of such a survey is because it extrapolates national statistics from a relatively small and localized sample, compared to a nationwide census for example. Therefore, many economic and financial analysts refer to the survey of employers for much more accurate indications as to employment rates. These measures include:

• Labour Market Participation Rate (a measure of the percentage of people between 15 and 64 years old who are currently working or looking for work)
• The total number of full-time jobs
• The total number of people seeking work
• The total number of person-hours worked in a month compared to the total number of person-hours people would be willing to work.