Unemployment Essay, Research Paper

Thesis

We begin by looking at some of the relevant facts that describe unemployment, such as, what unemployment is, the different types of unemployment and unemployment insurance. We then turn to the reasons why economies always experience some unemployment and the ways in which policymakers can help the unemployed. Explanations for the economy’s natural rate of unemployment: minimum-wage laws, unions, efficiency wages, and job search.

I. Unemployment

A. What is unemployment?

B. Why is there unemployment?

C. Measuring unemployment

D. Fighting unemployment

E. How long are the unemployed without work?

II. Different Types of Unemployment

A. Normal unemployment

i. Seasonal unemployment

B. Structural unemployment

i. Technological unemployment

C. Deficient demand unemployment

III. Unemployment Insurance

A. How it works

IV. Minimum-Wage Laws

V. Unions and Collective Bargaining

VI. The Theory of Efficiency Wages

A. Worker health

B. Worker turnover

C. Worker effort

D. Worker Quality

VII. Job Search

Losing a job can be the most distressing economic event in a person’s life. Most people rely on their labor earnings to maintain their standard of living and many people get from their work not only income but also a sense of personal accomplishment. A job loss means a lower living standard in the present anxiety about the future and reduced self-esteem. It is not surprising, therefore, that politicians campaigning for office often speak about how their proposed policies will help create jobs. We begin by looking at some of the relevant facts that describe unemployment, such as, what unemployment is, the different types of unemployment and unemployment insurance. We then turn to the reasons why economies always experience some unemployment and the ways in which policymakers can help the unemployed. Explanations for the economy’s natural rate of unemployment: minimum-wage laws, unions, efficiency wages, and job search.

What is Unemployment?

Unemployment is the state of a person who wants to work but does not have a job. The term does not refer to people who are not seeking work because of age, illness, or a mental or physical handicap. Nor does it refer to people who are attending school or keeping house. Such persons are classified as out of the labor force rather than unemployed. Unemployment involved serious problems for both the individual and society as a whole. For the individual it means loss of income, and in many cases, loss of self-respect. For society, it results in lost production and in some cases, criminal or other antisocial behavior. Until the 1900’s, most people considered laziness the main cause of unemployment. But today, they realize that men and women may be out of work through not fault of their own.

Why is There Unemployment?

Economists experience unemployment because, in most markets in the economy, prices adjust to bring quantity supplied and quantity demanded into balance. In an ideal labor market, wages would adjust to balance the quantity of labor supplied and the quantity of labor demanded. This adjustment of wages would ensure that all workers are always fully employed. Of course, reality does not resemble this ideal. There are always some workers without jobs, even when the overall economy is doing well. In other words, the unemployment rate never falls to zero; instead it fluctuates around the natural rate of unemployment.

Measuring Unemployment

The Bureau of the Census in the Department of Commerce collects and tabulates unemployment statistics in the United States. The Bureau of Labor Statistics in the Department of Labor analyzes and publishes the statistics. Every month, agents of the bureau visit a certain number of households in all parts of the country. They ask whether the members of each household who are 16 or older have jobs or are looking for work. The answers provide the basis for a monthly estimate of the nation’s total labor force that is unemployment. Businessmen, economists, and government officials study the reports for indications of the nation’s economic health.

The annual United States unemployment rate represents the average of the monthly figures for a certain year. It shows the average number of persons unemployed during the year, but not the total number who had some unemployment. In 1982, the average number of unemployed was over 10 million. But about twice that number were jobless at least one week during the year.

The unemployment rate varies greatly among various groups. It tends to be several times as high for teenaged workers as for older persons. Unskilled people experience about three times as much unemployment as do white-collar workers. The unemployment rate among blacks is about twice that among whites.

Economists disagree on the meaning of the unemployment rate. Some believe the rate exaggerates the problem because it includes persons who want only part-time jobs. Others argue that it underestimates the problem because it does not include discouraged workers who have stopped looking for jobs or workers who have taken jobs below the level of their skill.

Fighting Unemployment

The United Stated government has fought each type of unemployment differently. To combat normal unemployment, the government has established public employment agencies that inform unemployed workers of suitable job openings. To attack structural unemployment, the Manpower Development and Training Act of 1962 set up programs to train workers in skills required for available jobs. The Economic Opportunity Act of 1964 also provided help for workers requiring retraining or other special assistance.

The fight against deficient demand unemployment presents especially serious problems. If unemployment raises, the government may increase it’s spending in order to create jobs. But such spending can cause rising prices and other problems of inflation. The government may then have to choose between the evils of unemployment and those of inflation.

Some economists believe that unemployment rates as low as 3 to 4 percent should no longer be expected. They note that beginning in the 1960’s higher proportions of women and young people entered the labor force than ever before. These two groups have higher rates of unemployment than the rest of the population.

Some persons believe the government must become the employer of last resort if industry cannot use the nation’s total labor force. Under such a program, the government would create a job for any person who could not find one. The Emergency Employment Act of 1972 moved toward this goal. It provided federal funds for state and local governments to hire the unemployed.

How Long are the Unemployed Without Work?

One question to consider when asking how serious is the problem of unemployment, is whether unemployment is typically short-term or long-term condition. If the unemployment is short-term, one might think that it is not a big problem. Workers may require a few weeks between jobs to find the openings that best suit their skills and tastes. Yet if unemployment is long-term, one might think that it is a serious problem. Workers unemployed for many months are more likely to suffer economic and psychological hardship. Most spells of unemployment are short, and most unemployed observed at any given time is long-term. Most people who become unemployed will soon find jobs. Yet most of the economy’s unemployment problem is attributed to the relatively few workers who are jobless for long periods of time.

Types of Unemployment

Unemployment is classified into three categories, according to the basic causes. These categories are: normal, structural, and deficient demand.

Normal unemployment exists even when jobs are plentiful. Such unemployment includes workers who have quit their jobs or have been fired, and need some time to find other jobs. It also includes individuals, such as young people and former homemakers, who want employment but have not yet found their first job. Another kind of normal unemployment, called seasonal unemployment, occurs in industries that lay off workers during certain seasons each year. These industries include agriculture, construction, and shipping.

Structural unemployment exists when individuals seeking work have the wrong skills for the available jobs. For example, many coal miners may be looking for work at the same time that the nation has a shortage of salespeople and stenographers. Structural unemployment also includes individuals in the wrong location to fill available jobs. Structural unemployment includes technological unemployment, which results from the development of new products, machinery, or manufacturing methods. Such developments produce rapid charges in the demand for various skills. The total number of unemployment opportunities does not decline, but the number of jobs in certain occupations may grow less rapidly than in others or may even decline. In 1947, for example, clerical and professional workers made up only 19 percent of all employed persons. By the early 1980’s, they accounted for about 35 percent of the total. At the same time, the proportion of unskilled workers declined from about 12 percent to about 6 percent of the total.

Deficient demand unemployment results from a general lack of need for workers when the nation’s total spending is too little. As goods and services remain unsold, industries reduce production and lay off employees. Deficient demand unemployment is called cyclical unemployment if it occurs during periods of decreased business activity. But it also can occur during periods of increasing activity if the number of workers grows faster than then number of jobs.

The severest deficient demand unemployment in U.S. history occurred during the Great Depression of the 1930’s. The unemployment rate reached about 25 percent in 1933 and remained above 14 percent through 1940. After the United States entered World War II in 1941, the government began to spend huge amounts for military purposes. By 1944, the unemployment rate had dropped to 1.2 percent. In the late 1950’s and early 1960’s, the unemployment rate rose to more than 6 percent. Some economists thought the unemployment was structural and resulted from changes in the types of jobs available. Others thought it was deficient demand unemployment that resulted from too little spending. Then, in 1964, a tax cut allowed people to spend more money, and the government spent more on the Vietnam War. By 1966, unemployment had fallen to a 12-year low. Because the increase in spending reduced unemployment, economists saw that the problem had been deficient demand unemployment. In 1969, the government reduced spending to curb inflation, and unemployment rose again. A recession during the early 1980’s led to another rise in unemployment. In December 1982, the jobless rate reached 10.8 percent, the highest level since 1941.

Unemployment Insurance

Unemployment insurance protects workers who are out of work and are looking for employment. These unemployed workers receive cash payments, usually each week for a limited period. Most of the industrial countries of the world have unemployment insurance systems. About 40 of these programs are in effect, mostly in Europe, North America, and Australia. Trade unions adopted the first plans to help able-bodied wage earners who were temporarily out of work through no fault of their own. In great Britain, the Journeymen Steam Engine Makers’ Society began paying out-of-work benefits as early as 1824. In the late 1800’s and early 1900’s, Switzerland, Belgium, Denmark, France, Norway, and other European countries began public voluntary unemployment insurance plans. In 1911, Great Britain set up the first compulsory unemployment insurance system. After World War I, it began paying various types of allowances, commonly called the dole, to unemployed workers who had used up their unemployment benefits. In 1932, Wisconsin adopted the first unemployment insurance law in the United States. A federal-state unemployment insurance plan was established as part of the Social Security Act of 1935.

We now examine four reasons why actual labor markets depart from the ideal of full employment.

Minimum-Wage Laws

Although minimum wages are not the predominant reason for unemployment in our economy, they do have an important effect on certain groups with particularly high unemployment rates. When a minimum-wage law forces the wage to remain above the level that balances supply and demand, it raises the quantity of labor supplied and reduces the quantity of labor demanded compared to the equilibrium level. There is a surplus of labor. Because there are more workers willing to work than there are jobs, some workers are unemployed. Minimum-wage laws are not the predominant reason for unemployment. Minimum-wage laws are binding most often for the least skilled and least experienced members of the labor force, such as teenagers. It is only among these workers that minimum-wage laws explain the existence of unemployment.

Unions and Collective Bargaining

A union is a worker association that bargains with employers over wages and working conditions. Only 16 percent of the U.S. workers belong to unions, whereas they used to play a much larger role in the U.S. labor market in the past. In the 1940’s and 1950’s, when unions were at their peak, about a third of the United States labor force was unionized.

Most workers in the economy discuss their wages, benefits, and working conditions with their employers as individuals. In contrast, workers in a union do so as a group. This process by which unions and firms agree on the terms of employment is called collective bargaining. When a union raises the wage above the equilibrium level, it raises the quantity of labor supplied and reduces the quantity of labor demanded, resulting in unemployment.

Theory of Efficiency Wages

According to this theory, firms operate more efficiently if wages are above the equilibrium level. Therefore, it may be profitable for firms to keep wages high even in the presence of an excess supply of labor. There are several types of efficiency-wage theory. Each type suggests a different explanation for why firms may want to pay high wages. Four of these types are: Worker health; better paid workers eat a more nutritious diet, and workers who eat a better diet are healthier and more productive. A second type of efficiency-wage theory emphasizes the link between wages and worker turnover. The more a firm pays its workers, the less often its workers will choose to leave. A third type is worker effort. High wages make workers more eager to keep their jobs and, therefore, giving workers incentive to put forward their best effort. A fourth and final type emphasizes between wages and worker quality. By paying a high wage, the firm attracts a better pool of workers to apply for its jobs.

Job Search

Job search is the fourth reason why economies always experience some unemployment. If all workers and all jobs were the same, so that all workers were equally well suited for all jobs, job search would not be a problem. Laid-off workers were quickly find new jobs that were well suited for them. But, the fact is that all workers differ in their tastes and skills, jobs differ in their attributes, and information about job candidates and job vacancies is disseminated slowly among the many firms and households in the economy. The unemployment that arises because of job search is, in an important sense, different from the unemployment that arises because of minimum-wage laws, unions, and efficiency wages. In the previous three cases, the wage is above the equilibrium level, so the quantity of labor supplied exceeds the quantity of labor demanded. Workers are unemployed because they are waiting for jobs to open up. By contrast, job search is not due to the failure of wages to balance labor supply and labor demanded. When job search is the explanation for unemployment, workers are searching for the jobs that best suit them.

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