Unemployment Totally Explained

Unemployment is the state in which a worker wants, but is unable, to work. The unemployment rate is the number of unemployed workers divided by the total civilian labor force. The unemployment rate is also used in economic studies and economic indexes such as the Conference Board's Index of Leading Indicators.

Individual costs

Unemployed individuals are unable to earn money to meet financial obligations. Failure to pay mortgage payments or to pay rent may lead to homelessness through foreclosure or eviction. The loss of health insurance benefits that comes with unemployment increases susceptibility to malnutrition, illness, mental stress, and loss of self-esteem, leading to depression.
Dr. M. Harvey Brenner conducted a study in 1979 on the "Influence of the Social Environment on Psychology." Brenner found that for every 10% increase in the number of unemployed there's a 1.2% in total mortality, a 1.7% increase in cardiovascular disease, 1.3% more cirrhosis cases, 1.7% more suicides, 0.4% more arrests, and 0.8% more assaults reported to the police.However, during the Great Depression, when unemployment rates exceeded 20% in many countries, the crime rate didn't decreased. Because unemployment insurance in the U.S. typically doesn't replace 50% of the income one received on the job (and one can't receive it forever), the unemployed often end up tapping welfare programs such as Food Stamps or accumulating debt. Higher government transfer payments in the form of welfare and food stamps decrease spending on productive economic goods, decreasing GDP.
Some hold that many of the low-income jobs are not really a better option than unemployment with a welfare state (with its unemployment insurance benefits). But since it's difficult or impossible to get unemployment insurance benefits without having worked in the past, these jobs and unemployment are more complementary than they're substitutes. (These jobs are often held short-term, either by students or by those trying to gain experience; turnover in most low-paying jobs is high, in excess of 30%/year.) Unemployment insurance keeps an available supply of workers for the low-paying jobs, 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 don't fit their skills or allow them to use their talents. Unemployment can cause underemployment. This is one of the economic arguments in favor of having unemployment insurance.
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 oligopsony 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.

Economic benefits

Unemployment may have advantages as well as disadvantages for the overall economy. Notably, it may help avert runaway inflation, which negatively affects almost everyone in the affected economy and has serious long-term economic costs. However the historic assumption that full local employment must lead directly to local inflation has been attenuated, as recently expanded international trade has shown itself able to continue to supply low-priced goods even as local employment rates rise closer to full employment.
The inflation-fighting benefits to the entire economy arising from a presumed optimum level of unemployment has been studied extensively. Before current levels of world trade were developed, unemployment was demonstrated to reduce inflation, following the Phillips curve, or to decelerate inflation, following the NAIRU/natural rate of unemployment theory.
Beyond the benefits of controlled inflation, frictional unemployment provides employers a larger applicant pool from which to select employees better suited to the available jobs. The unemployment needed for this purpose may be very small, however, since it's relatively easy to seek a new job without losing one's current one. And when more jobs are available for fewer workers (lower unemployment), it may allow workers to find the jobs that better fit their tastes, talents, and needs.
As in the Marxian theory of unemployment, special interests may also benefit: some employers may expect that employees with no fear of losing their jobs won't work as hard, or will demand increased wages and benefit. According to this theory, unemployment may promote general labor productivity and profitability by increasing employers' monopsony-like power (and profits).
Optimal unemployment has also been defended as an environmental tool to brake the constantly accelerated growth of the GDP to maintain levels sustainable in the context of resource constraints and environmental impacts. However the tool of denying jobs to willing workers seems a blunt instrument for conserving resources and the environment -- it reduces the consumption of the unemployed across the board, and only in the short-term. Full employment of the unemployed workforce, all focused toward the goal of developing more environmentally efficient methods for production and consumption might provide a more significant and lasting cumulative environmental benefit and reduced resource consumption. If so the future economy and workforce would benefit from the resultant structural increases in the sustainable level of GDP growth.

Causes

Open unemployment of the sort defined above is associated with capitalist economies. Preliterate communities treat their members as parts of an extended family and thus don't allow unemployment. In precapitalist societies such as European feudalism, the serfs, though clearly dominated and exploited by the lords, were never "unemployed" because they'd direct access to the land, and the needed tools, and could thus work to produce crops. Just as on the American frontier during the nineteenth 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'd 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. (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 — don't let their members become unemployed unless the co-op itself goes bankrupt.
   Since 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's 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 and not counted.
   Others argue that unemployment actually increases the more the government intervenes into the economy. For example, minimum wages raise costs of doing business and businesses respond by laying off workers. Laws restricting layoffs make businesses less likely to hire in the first place leaving many young people unemployed and unable to find work.
   The results of both actions lead to less productivity and are claimed to incur a higher cost on society as a whole. The results lead to not just higher unemployment but may increase poverty. This is why the less market oriented countries of Europe often sustain substantially high unemployment rates in comparison to the United States; that is, government induced employment through policies designed to protect the worker. The welfare state then responds with various benefits that are paid for by the middle and upper class which reduces their ability to consume and is theorised to reduce the incentive to work hard and innovate. Economists like Ludwig Von Mises, Milton Friedman, Friedrich Von Hayek, and many others not only believe that the welfare of society decreases with this kind of intervention but that these economic policies are not sustainable.

Government spending as a cause or cure for unemployment

Some economists found high correlations between government spending as a percentage of GDP to unemployment from 1981 to the present using data from the Bureau of Labor Statistics. The correlation between government spending was negative during the 1940 to 1980 period. However, the Misery Index was steadily rising during this period. These same economists state that the unemployment supply curve is actually vertical, that labor will work under any condition provided work is available, and the economic element with the most power to shift it's government.

Debate on causes

There is considerable debate among economists as to the causes of unemployment. 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 labour markets (structural unemployment). Classical or neoclassical economics tends to reject these explanations, and focuses more on rigidities imposed on the labor 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 capitalis.
Though there have been several definitions of voluntary and involuntary unemployment in the economics literature, a simple distinction is often applied. Voluntary unemployment is attributed to the individual unemployed workers (and their decisions), whereas involuntary unemployment exists because of the socio-economic environment (including the market structure, government intervention, and the level of aggregate demand) in which individuals operate. 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. 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. See also: unemployment types Some say that one of the main causes of unemployment in a free market economy is the fact that the law of supply and demand isn't really applied to the price to be paid for employing people. In situations of falling demand for products and services the wages of all employees, from president to errand boy, are not automatically reduced by the required percentage to make the business viable. Others say that it's the market that determines the wages based on the desirability of the job. The more people qualified and interested in the job, the lower the wages for that job become. Based on this view, the profitability of the company isn't a factor in determining whether or not the work is profitable to the employee. People are laid off, because pay reductions would reduce the number of people willing to work a job. With fewer people interested in a particular job, the employees bargaining power would actually rise to stabilize the situation, but their employer would be unable to fulfill their wage expectations. 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. Others say many of the problems with market adjustment arise from the market itself, Keynes, or from the nature of capitalism, Marx.
In developing countries unemployment is often caused by burdensome government regulation. The World Bank's Doing Business project shows how excessive labor regulation increases unemployment among women and youths in Africa, the Middle East and Latin America.

Types

Frictional: When moving from one job to another, the unemployment temporarily experienced when looking for a new job. ;Structural: Caused by a mismatch between the location of jobs and the location of job-seekers. "Location" may be geographical, or in terms of skills. The mismatch comes because unemployed are unwilling or unable to change geography or skills.

Cyclical (Demand deficient unemployment) unemployment: When there isn't enough aggregate demand for the labor. Caused by a business cycle recession. ;Technological: Caused by the replacement of workers by machines or other advanced technology.

Classical (real-wage): When real wages for a job are set above the market-clearing level, commonly government (as with the minimum wage) or unions, although some (such as Murray Rothbard, America's Great Depression p. 45) suggest that even social taboos can prevent wages from falling to the market clearing level. ;Marxian: When unemployment is needed to motivate workers to work hard and to keep wages down.

Seasonal: When an occupation isn't in demand at certain seasons. For example, construction workers in winter, ski instructors in summer.

Measurement

Though many people care about the number of unemployed, economists typically focus on the unemployment rate. This corrects for the normal increase in the number of people employed due to increases in population and increases in the labor force relative to the population. The unemployment rate is expressed as a percent, and calculated as follows:

Unemployment Rate=frac*100

As defined by the International Labour Organization, "unemployed workers" are those who are currently not working but are willing and able to work for pay, currently available to work, and have actively searched for work.
The ILO describes 4 different methods to calculate the unemployment rate:

Labour Force Sample Surveys are the most preferred method of unemployment rate calculation since they give the most comprehensive results and enables calculation of unemployment by different group categories such as race and gender. This method is the most internationally comparable.
Official Estimates are determined by a combination of information from one or more of the other three methods. The use of this method has been declining in favor of Labour Surveys.
Social Insurance Statistics such as unemployment benefits, are computed base on the number of persons insured representing the total labour force and the number of persons who are insured that are collecting benefits. This method has been heavily criticized due to the expiration of benefits before the person finds work.
Employment Office Statistics are the least effective being that they only include a monthly tally of unemployed persons who enter employment offices. This method also includes unemployed who are not unemployed per the ILO definition.

European Union (Eurostat)

Eurostat, the statistical office of the European Union, defines unemployed as those persons age 15 to 74 who are not working, have looked for work in the last four weeks, and ready to start work within two weeks, which conform to ILO standards. Both the actual count and rate of employment are reported. Statistical data is available by member state, EU12, EU15, EU25, EU27, EA11, and EA13. Eurostat also includes a long-term unemployment rate. This is defined as part of the unemployed who have been unemployed for an excess of 1 year.
Three methods of data collection are used in the European Union. The European Union Labour Force Survey (EU-LFS) collects data on all member states each quarter. For monthly calculations, national surveys or national registers from employment offices are used in conjunction with quarterly EU-LFS data. Monthly unemployment rates are interpolated from monthly data from member states to provide "harmonized data."
At this time Germany's unemployment data is collected separately from the (EU-LFS).

United States Bureau of Labor Statistics

There was an official measure of 6.8 million unemployed in the U.S. as of April 2007, a rate of 4.5%.
The Bureau of Labor Statistics measures employment and unemployment (of those over 16 years of age) using two different labor force surveys conducted by the United States Census Bureau (within the United States Department of Commerce) and/or the Bureau of Labor Statistics (within the United States Department of Labor) that gather employment statistics monthly. The Current Population Survey (CPS), or "Household Survey", conducts a survey based on a sample of 60,000 households. This Survey measures the unemployment rate based on the ILO definition.The data is also used to calculate 5 other unemployment rates as a percentage of the labor force based on different definitions noted as U1 through U6:

U1: Percentage of labor force unemployed 15 weeks or longer.

U2: Percentage of labor force who loss jobs or completed temporary work.

U3: Official unemployment rate per ILO definition.

U4: U3 + "discouraged workers", or those who have stopped looking for work because current economic conditions makes them believe that no work is available for them.

U5: U4 + other "marginally attached workers", or those who "would like" and are able to work, but have not looked for work recently.

U6: U5 + Part time workers who want to work full time, but can not due to economic reasons. Note: "Marginally attached workers" are added to the total labor force for unemployment rate calculation for U4, U5, and U6. The Current Employment Statistics survey (CES), or "Payroll Survey", conducts a survey based on a sample of 160,000 businesses and government agencies that represent 400,000 individual employers.
   These statistics are for the U.S. economy as a whole, hiding variations among groups. For April 2007 in the U.S. the unemployment rates were 4.0% for adult men, 3.8% for adult women, 3.9% for Caucasians, 5.4% for Hispanics or Latinos (all races), 8.2% for African American, 15.3% for teenagers.
   In the early stages of an economic boom, unemployment often rises. 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've actually found a position they're counted as unemployed. Similarly, during a recession, the increase in the unemployment rate is moderated by people leaving the labor force.
   Due to these deficiencies, many labor market economists prefer to look at a range of economic statistics such as labor 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, and the total number of person-hours worked in a month compared to the total number of person-hours people would like to work.

Aiding the unemployed

The most developed countries have aids for the unemployed as part of the welfare state. These unemployment benefits include unemployment insurance, welfare, unemployment compensation and subsidies to aid in retraining. The main goal of these programs is to alleviate short-term hardships and, more importantly, to allow workers more time to search for a good job.
In the U.S. the unemployment insurance allowance one receives is based solely on previous income (not time worked, family size, etc.) and usually compensates for one-third of one's previous income. To qualify, one must reside in their respective state for at least a year and, of course, work. While 90% of citizens are covered on paper, only 40% could actually receive benefits as unemployment is based on an antiquated system created in the Social Security Act of 1935. In cases of highly seasonal industries the system provides income to workers during the off seasons, thus encouraging them to stay attached to the industry.
In the United States the New Deal made unemployment relief a top governmental priority. The goal of the Works Progress Administration (WPA) was to employ most of the unemployed people on relief until the economy recovered. FERA/WPA director Harry Hopkins testified to Congress in January 1935 why he set the number at 3.5 million, using FERA data. At $1200 per worker per year he asked for and received $4 billion.

"On January 1 there were 20 million persons on relief in the United States. Of these, 8.3 million were children under sixteen years of age; 3.8 million were persons who, though between the ages of sixteen and sixty-five were not working nor seeking work. These included housewives, students in school, and incapacitated persons. Another 750,000 were persons sixty-five years of age or over. Thus, of the total of 20 million persons then receiving relief, 12.85 million were not considered eligible for employment. This left a total of 7.15 million presumably employable persons between the ages of sixteen and sixty-five inclusive. Of these, however, 1.65 million were said to be farm operators or persons who had some non-relief employment, while another 350,000 were, despite the fact that they were already employed or seeking work, considered incapacitated. Deducting this two million from the total of 7.15 million, there remained 5.15 million persons sixteen to sixty-five years of age, unemployed, looking for work, and able to work. Because of the assumption that only one worker per family would be permitted to work under the proposed program, this total of 5.15 million was further reduced by 1.6 million--the estimated number of workers who were members of families which included two or more employable persons. Thus, there remained a net total of 3.55 million workers in as many households for whom jobs were to be provided." [Howardp 562, paraphrasing Hopkins]

The WPA didn't quite reach 3.5 million--its maximum was 3.3 million in November 1938. Worker pay was based on three factors: the region of the country, the degree of urbanization and the individual's skill. It varied from $19/month to $94/month. The goal was to pay the local prevailing wage, but to limit a person to 30 hours or less a week of work. About 75 percent of WPA employment and 75 percent of WPA expenditures went to public infrastructure, such as highways, airports, parks and libraries.
The WPA had numerous critics who said that political considerations helped decide which states received the most funding. Civil rights leaders often complained that African Americans were proportionally underrepresented. In New Jersey, they argued, "In spite of the fact that Negroes indubitably constitute more than 20 per cent of the State's unemployed, they composed 15.9 per cent of those assigned to W.P.A. jobs during 1937." [Howard287] Nationwide in late 1937, 15.2% were African American. The NAACP magazine Opportunity hailed the WPA: [February,1939, p. 34. in Howard 295]

It is to the eternal credit of the administrative officers of the WPA that discrimination on various projects because of race has been kept to a minimum and that in almost every community Negroes have been given a chance to participate in the work program. In the South, as might have been expected, this participation has been limited, and differential wages on the basis of race have been more or less effectively established; but in the northern communities, particularly in the urban centers, the Negro has been afforded his first real opportunity for employment in white-collar occupations

Congress shut down the WPA in late 1943 as World War II created thousands of jobs in the military. > Relief cases 1936-1941
Monthly average in 1,000

Year	1936	1937	1938	1939	1940	1941
Workers employed
WPA	1,995	2,227	1,932	2,911	1,971	1,638
CCC and NYA	712	801	643	793	877	919
Other federal work projects	554	663	452	488	468	681
Public assistance cases
Social security programs	602	1,306	1,852	2,132	2,308	2,517
General relief	2,946	1,484	1,611	1,647	1,570	1,206
Total families helped	5,886	5,660	5,474	6,751	5,860	5,167
Unemployed workers (Bur Lab Stat)	9,030	7,700	10,390	9,480	8,120	5,560
Coverage (cases/unemployed)	65%	74%	53%	71%	72%	93%

source: Donald S. Howard, WPA and Federal Relief Policy. 1943 p 34.

Year	Unemployment (% labor force)
1933	24.9
1934	21.7
1935	20.1
1936	16.9
1937	14.3
1938	19.0
1939	17.2
1940	14.6
1941	9.9
1942	4.7
1943	1.9
1944	1.2
1945	1.9

source: Historical Statistics US (1976) series D-86

Involuntary unemployment

But, as regards involuntary unemployment, the classical/neoclassical theorist relies on "Say's law" which declares, in fine, that "markets clear" in an unfettered, unregulated laissez-faire economy: every seller will find a buyer at some strike price, every buyer will find a seller at some strike price, and "every Jack shall have his Jill" in a "free" market. Sellers and buyers may refuse the strike price but this is taken as personal decision which causes the selling, or buying, atom to leave the economic model.
   This theory, this "law" relies heavily on the absence of government regulation and assumes a developed economy without sabotage where labor strikes, as opposed to strike (mutually agreed upon) prices, are illegal.
   Keynes tried to demonstrate in The General Theory of Employment, Interest and Money that Say's law didn't work in the real world of the 1930s Depression because of oversaving and private investor timidity, and that in consequence people could be thrown out of work involuntarily without being able to find acceptable new jobs.
This theoretic oddity of the classical and neo theories has, post-Keynes, had a strong influence on government policy. Post-Keynes, the tendency is for government to curtail and eliminate unemployment benefits and "make-work" government jobs, and to encourage the job-seeker to use his imagination, both considering the job search a career in itself and becoming-willing to accept lower wages, new "careers," or even relocation to another city or country in order to fulfill the expectation created by Say's "law"...which tends to broaden the "market" to a national or global level far beyond that which most real people are comfortable with.
   Involuntary unemployment doesn't exist in agrarian societies nor is it formally recognized to exist in underdeveloped but urban societies such as the mega-cities of Africa and of India/Pakistan, given that, in such societies, the suddenly unemployed person must meet his survival needs, by getting a new job quickly at any strike price, entrepreneurship, or joining the invisible economy of the hustler.
   From the narrative standpoint, whether the stories we tell ourselves, the stories related by Ehrenreich, the narrative sociology of Bourdieu, or novels of social suffering such as John Steinbeck's Of Mice and Men, involuntary unemployment certainly exists. Surprisingly, it's denied to exist in at least some classical and neo-classical, laissez-faire economic theories.
   Even more surprisingly, effective job seekers (unlike Ms. Ehrenreich in Bait and Switch, who failed to get hired as a publicist on a pretend job hunt she performed to get material for her book) make a third step representing a "dialectical" advance over both classical/neo economists, and writers on the left: they narrate their search using the language of freedom of choice and taking responsibility (Bourdieu 2000) in a rather conservative register, and often seem to have more success when they do this instead of "whine."

Benefits

Some critics of the "culture of work" such as anarchist Bob Black see employment as overemphasized culturally in modern countries. Such critics often propose quitting jobs when possible, working less, reassessing the cost of living to this end, creation of jobs which are "fun" as opposed to "work," and creating cultural norms where work is seen as unhealthy. These people advocate an "anti-work" ethic for life.

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