UNEMPLOYMENT:WHAT IT IS, CAUSES AND THE SOLUTION
INTRODUCTION:
WHAT IS UNEMPLOYMENT: Unemployment is defined by the Bureau of Labor Statistics (BLS) as people who do not have a job, have actively looked for work in the past four weeks, and are currently available for work. Also, people who were temporarily laid off and are waiting to be called back to that job are included in the unemployment statistics.
Those who have not looked for work within the past four weeks are not only no longer counted among the unemployed, they are also removed from the labor force by the BLS Most people leave the labor force when they retire, go to school, have a disability that keeps them from working, or have family responsibilities. However, even people who would like to work are excluded if they aren't actively looking for work. Here's how the Labor Force Participation Rate is calculated.
The BLS does keep track of those people, though. They are separately reported in the Jobs Report. Those who have looked for work within the past 12 months, but not within the past four weeks, are categorized as "marginally attached to the labor force." There is a subset of the marginally attached, those who have just given up looking because they don't think there are jobs out there for them. The BLS calls them discouraged workers, and they will probably start looking for work again whenever the job market improves. For this reason, many people feel that the BLS does not report the real unemployment rate. How Are Unemployment Statistics Used?
Unemployment is an important statistic used by the government to gauge the health of the economy. If the unemployment rate gets too high (around 6% or more), the government will try to stimulate the economy and create jobs. The Federal Reserve will first step in with expansionary monetary policy, and lower the Federal funds rate.
If this doesn't work, then the Federal government will use expansion a fiscal policy. It can directly create jobs by hiring employees for public works projects. It can indirectly create jobs by stimulating demand with extended unemployment benefits. These benefits aid the unemployed until they can find jobs. These are just some of the unemployment solutions the government has at its disposal.
You may think that unemployment can't get too low, but actually it can. Even in a healthy economy, there should always be a natural rate of unemployment. That's because people move before they get a new job, they are getting retrained for a better job, or they have just started looking for work and are waiting until they find just the right job. The lowest unemployment has ever been is 2.5%. Even when the unemployment rate is 4%, it's difficult for companies to expand because they have a hard time finding good workers.
TYPES OF UNEMPLOYMENT
There are three main types of unemployment: structural, frictional and cyclical. The first two make up the natural unemployment rate, while the third rises when demand falls, usually during a recession. Some economists include as many as five types of unemployment, such as seasonal and classical.
CYCLIC UNEMPLOYMENT
Cyclical unemployment is not part of the natural unemployment rate. It's strictly caused by the contraction phase of the business cycle. That's when demand for goods and services fall dramatically, forcing businesses to lay off large numbers of workers to cut costs. Cyclical unemployment usually creates more unemployment, because the laid-off workers now have less money to buy the things they need, further lowering demand. Government intervention, in the form of expansive monetary policy and even fiscal policy, is usually required to stop the downward spiral. After the stock market crash of 1929, the government did not step in right away. This led to the Great Depression, which lasted 10 years and led to a 25% unemployment rate. Frictional Unemployment: Definition and Examples
Frictional Unemployment
Frictional unemployment is when workers leave their jobs to find better ones. It's usually thought of as a voluntary exit, but can also occur as a result of a layoff or termination with cause. The time, effort and expense it takes to find these new jobs is known as friction. It occurs because workers need to find out about possible new job opportunities, go on interviews and possibly move before starting their new jobs.
Structural Unemployment
Structural unemployment is a more permanent level of unemployment that's caused by forces other than the business cycle. It can be the result of an underlying shift in the economy that makes it difficult for certain segments of the population to find jobs. It's typically when there is a mis-match between the jobs available and the skill levels of the unemployed. Compare it to the other types of unemployment.
Structural unemployment can create a higher unemployment rate long after a recession is over. If ignored by policy-makers, it can then even lead to a higher natural unemployment rate. See how this occurred in U.S. Unemployment Rate by Years.
Causes of Structural Unemployment
Structural unemployment can be created when there are technological advances in an industry. This has happened in manufacturing, where robots have been replacing unskilled workers. These workers must now get training in computer operations to manage the robots and other sophisticated technology to get jobs in the same factories they worked in before.
Structural unemployment can also be caused by trade agreements, such as NAFTA. When trade restrictions were eased, many factories relocated to Mexico, leaving their former employees without a place to work. Here's more causes of unemployment.
Examples of Structural Unemployment
Structural unemployment can also occur if a country's economic growth is dependent upon industries that are in decline.
For example, the newspaper industry has been in decline since 2000, as web-based advertising has taken over its source of revenue. Employees, such as journalists, printers and newspaper delivery boys, who were dependent upon that industry contribute to structural unemployment after they've been laid off. Since their skills were narrowly focused on the newspaper's method of distributing news, they have a harder time getting a different job unless they are retrained.
Farmers in emerging market economies are another example of structural unemployment. As free trade allowed global food corporations access to their markets, small-scale farmers were put out of business. They couldn't compete with the lower prices of the global firms. As a result, they headed to cities in search of work. This structural unemployment existed until they were retrained, perhaps in factory work.
Did the Financial Crisis Create Structural Unemployment?
The financial crisis of 2008 created record levels of unemployment, as 8.3 million jobs were lost. By 2009, the unemployment rate had risen to 10.1%. Housing, which usually drives the expansion phase of the business cycle, was suppressed by a wave of foreclosures. As a result, nearly half the unemployed were out of a job for six months or more. This created structural unemployment, as their skills and experience started to become outdated.
This hit the older jobless person the most. Although younger workers were more likely to be unemployed, they weren't that way for long. They either found a low-paying job more quickly, or went back to school, dropping out of the labor force altogether. Their unemployment duration was bad enough, at 19.9 weeks, but less than the older unemployed.
Those between 55-64 were out of work for 44.6 weeks, or almost a year. Those over age 65 looked for work 43.9 weeks before finding a job or just giving up -- and being forced into early retirement. Why? There were five reasons:
1. Older workers were more likely to have been in industries, like newspapers, that were being replaced by new technology.
2. They were less likely to go back to school.
3. They were less able to move to find a new job because they owned their own home. The depressed housing market meant they'd be more likely to lose money, or default on an upside-down mortgage, if they did try to sell.
4. Many older workers might not be willing to take a lower-paying job.
5. Older workers faced unacknowledged age discrimination.
Impact of Structural Unemployment on the Post-Recession Economy
This structural unemployment means that the mis-match between jobs requiring technical skills and the long-term unemployed, older worker without those skills will lead to greater income inequality in the U.S. It will exacerbate the discrepancy between the technically skilled, prosperous workforce and those without those skills, who have to settle for low-paying, transitory jobs.
Furthermore, a Kauffman Foundation survey of fast-growing private companies showed 40% said that difficulties in finding skilled workers was a bigger obstacle to growth than lack of demand. (Source: FT.com, Skills Gap Hobbles U.S. Employers, December 13, 2011)
Second, many older unemployed will rely more heavily, and sooner, on Social Security and Medicare than they would have if they still held jobs. Many of them might draw down Social Security at 62 instead of waiting for larger payouts at 65 or older. This will weigh heavily on the Federal budget, already facing record levels of debt. Article updated July 2, 2015
THE MAJOR CAUSES OF UNEMPLOYMENT
Nationally, unemployment is caused when the economy slows down, and businesses are forced to cut costs by reducing payroll expenses. The 2008 financial crisis created the worst unemployment since the 1980s. Here's past recessions and their unemployment rates.
Unemployment can also be caused by competition in specific industries or companies. Advanced technology, such as computers or robots, cause unemployment by replacing worker tasks with machines. Jobs outsourcing is a significant cause of unemployment. It's especially bad in technology, call centers and human resources.
CONSEQUENCES OF UNEMPLOYMENT
The consequences of unemployment for the individual is financially and often emotionally destructive. The consequences for the economy can also be destructive if unemployment rises above 5-6%. When that many people are unemployed, the economy loses one of its key drivers of growth -- consumer spending. Quite simply, workers have less money to spend until they find another job. If high national unemployment continues, it can deepen a recession or even cause a depression. That's because less consumer spending from unemployed workers reduces business revenue, which forces companies to cut more payroll to reduce their costs. This can become a downward spiral very quickly.
One of the consequences of the Great Recession is that workers have been unemployed for a very long time. These long-term unemployed have been out of work, and looking, for more than six months.
If they've been out of work even longer, their job skills may no longer match the requirements of the new jobs being offered. This is called structural unemployment. Many of them are 55 or older. They may not be able to get a good job again, despite laws prohibiting age discrimination. They may get part-time or low-paying entry jobs to make ends meet, then become unemployed again until they can take down early Social Security benefits at age 62. For this reason, many economists think the recession permanently increased the natural rate of unemployment. Article updated January 9,2015.
SOLUTIONS TO UNEMPLOYMENT PROBLEM
Atempts to reduce the level of unemployment beyond the Natural rate of unemployment generally fail, resulting only in less output and more inflation. However the following ways may reduce unemployment.
Phillips Curve
It used to be largely believed that unemployment could be solved using the Phillips curve. This involves increasing inflation to reduce unemployment by fooling workers into accepting jobs at a lower rate than they would otherwise have done, due to the declining value of money. However, since the work of Milton Friedman, it is widely accepted that the Phillips curve is vertical in the long run: you cannot achieve a lowering of the unemployment rate in the long run, and attempts to do so will only cause inflation.
Demand side policies
Monetary policy and fiscal policy can both be used to increase short-term growth in the economy, increasing the demand for labour and decreasing unemployment. The demand for labour in an economy is derived from the demand for goods and services. As such, if the demand for goods and services in the economy increases, the demand for labour will increase, increasing employment and wages.
Supply side policies
Minimum wages and union activity keep wages from falling, which means too many people want to sell their labour at the going price but cannot. Supply-side policies can solve this by making the labour market more flexible. These include removing the minimum wage and reducing the power of unions, which act as a labour cartel.
Other supply side policies include education to make workers more attractive to employers. Cutting taxes onn businesses and reducing regulation, create jobs and reduce unemployment.
Shifting tax burden
This method will shift tax burden to capital intensive firms and away from labour intensive firms. In theory this will make firms shift operations to a more politically desired balance between labour intensive and capital intensive production. The excess tax revenue from the jobs levy would finance labour intensive public projects. However, by raising the value of labour artificially above capital, this would discourage capital investment, the source of economic growth. With less growth, long-run employment would fall.
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