Unemployment: Difference between revisions

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Because of its traumatic effects on those who experience it, [[unemployment]] is a matter of widespread  concern. Its causes and consequences have  been  topics of investigation and of  controversy in  economics,  and in psychology and sociology.  On some occasions its limitation has been made a policy objective, and on others it has been used as  an instrument of policy. Its harm can be mitigated but there is no prospect of its elimination.
==Terminology==
Economics textbooks sometimes refer to four categories of unemployment:
* [[frictional unemployment]], which happens to people who leave one job to search for another; 
* [[structural unemployment]], which happens to people whose skills are no longer needed because of changes in technology or industry structure;
* wage-rigidity-, or [[classical unemployment|classical]], unemployment, which happens when wages are maintained at a level at which the demand for labour falls short of its supply; and
* demand-deficient-, or [[Keynesian theory|Keynesian]], unemployment, which occurs in a [[recession]] when the demand for labour falls short of its supply  for [[macroeconomics|macroeconomic ]] reasons.<br>
None of those categories of unemployment can be defined with any precision for statistical purposes, and the term unemployment can itself be defined for those purposes only by drawing some arbitrary distinctions between unemployment and other forms of under-utilisation of labour. International and national [[/Addendum#International definitions|statistical definitions]] have been published, all of which leave some scope for subjective interpretation.
The [[unemployment rate]] is the amount of unemployment expressed as a percentage of the [[labour force]].<br>
A [[discouraged worker]] is one who has stopped searching for suitable work because he believes that none is available.<br>
The term [[full employment]] is usually defined as a situation in which the number of [[vacancy (economics)|vacancies]] exceeds the number unemployed, but it may alternatively be taken  to mean the absence of unemployment other than frictional and structural unemployment.<br>
The term [[natural rate of unemployment]]  usually  means the same as  [[non-accelerating-inflation rate of unemployment]], but it is  sometimes used to mean  the unemployment rate that rules  when the growth rate of the economy is in line with its long-term rate.<br>
The [[Beveridge curve]] traces the relationship between unemployment and reported [[vacancy (economics)|vacancies]], and the [[Okun curve]] traces the effect upon unemployment of a fall in [[GDP]].
==The effects of unemployment==
Before there was social security protection, the dominant effect of unemployment was  physical deprivation. The  [[Great Depression in the United States#Social Consequences (1930-36)|social consequences of the Great Depression ]] in the United States included acute malnutrition and homelessness.  Nowadays, however, the psychological consequences tend to predominate. Recent survey evidence indicates that German  workers value the psychological cost of unemploment at  as much as three times the associated loss of income<ref>[http://papers.ssrn.com/sol3/papers.cfm?abstract_id=984248 Andreas Knabe and Steffen Raetze: ''Quantifying the Non-Pecuniary Costs of Unemployment: The Role of Permanent Income'', FEMM Working Paper No. 12/2007, April 2007]</ref>. Fear of unemployment is also psychologically harmful,  even to the extent of being an important predictor of psychological symptoms<ref> Catherine Marsh and Carolyn Vogler (eds): ''Social Change and the Experience of Unemployment'' pp191-212, Oxford University Press 1994 [http://www.questia.com/read/74455918?title=Social%20Change%20and%20the%20Experience%20of%20Unemployment#](Questia subscribers)</ref>. The loss of employment by  family wage earners has been found to  be particularly burdensome because it cuts deeply into their sense of obligation, their identity, and their status;  and unemployment after marriage has been found to increase the incidence of divorce.
<ref>[http://www.allacademic.com//meta/p_mla_apa_research_citation/2/4/0/3/4/pages240344/p240344-1.php Cristobal Young: ''Unemployment, Income, and Subjective Well-Being: Non-Pecuniary Costs of Unemployment'', allacademic, October 2007]</ref>.  The duration of unemployment has a significant influence: Americans who are unemployed for more than six months have been found to be much more likely to experience daily negative emotions, including worry, sadness, and stress and somewhat less likely to report positive emotions, such as happiness, than are those who are unemployed for a shorter time
<ref>[http://www.gallup.com/poll/139604/worry-sadness-stress-increase-length-unemployment.aspx Jenny Marlar: ''Worry, Sadness, Stress Increase With Length of Unemployment'', Gallup, June 2010]</ref>. It has also been found that unemployed British men are less healthy, and have  higher mortality rates, than are employed men
<ref>[http://www.bmj.com/cgi/content/full/338/mar10_2/b829 Danny Dorling: ''Unemployment and Health'', British Medical Journal, 10 March 2009]</ref>.
==The history of unemployment==
===Pre-war experience===
The earliest well-documented accounts of mass unemployment concern  the [[Great Depression]] of the 1930s<ref>[http://books.google.com/books?id=i5pHMLyS8WwC&printsec=frontcover&source=gbs_summary_r&cad=0#PPA1948,M1 Russell Freedman ''Children of the Great Depression'', Houghton Mifflin Harcourt, 2005]</ref> - (the human consequences of which are graphically depicted in John Steibeck's "Grapes of Wrath"<ref> John Steinbeck: ''The Grapes of Wrath'', Viking Press, 1939</ref>).  The numerical records of unemployment for that period  are based upon administrative records,  on the basis of which  it has been estimated that  25 per cent of all United States workers - including 37 per cent of  its nonfarm workers - became unemployed <ref>[http://www.econlib.org/library/Enc/GreatDepression.html Gene Smiley: ''Great Depression'', Library of Economics and Liberty]</ref>. Numerical estimates of 19th century mass unemployment are not available but it must be assumed to have been commonplace then, in view of the  many recessions that occurred in the United States <ref>[http://www.nber.org/cycles/ ''US Business Cycle Expansions and Contractions'', National Bureau of Economic Research, 2010]</ref> and elsewhere. Earlier occurrences have also been reported, going back to the 16th century <ref>R. H. Tawney: ''The Agrarian Problem in the Sixteenth Century'', Longmans, Green  1912</ref> and before.
===Recent trends===
After the war there was no  major mass unemployment until the oil crisis of 1973 - which was followed by a series of [[recession]]s  that continued through  the 1980s and 1990s. Databases of [[/Addendum#Unemployment statistics - sources|unemployment statistics]] trace the  patterns of  unemployed rates  by age, gender, age and duration over the past 30 years.  Differences among [[/Addendum#National definitions|national definitions]] and [[/Addendum#Collection methods|collection methods]] make international comparisons  hazardous, but  approximate comparisons between internationally harmonised rates<ref>[http://laborsta.ilo.org/STP/guest ILO Comparable Estimates, International Labour Office, 2010]]</ref> are also available. During that period
[[/Addendum#Unemployment statistics - trends|annual unemployment rates]] in the larger developed economies have topped 10 per cent during recessions and  have usually averaged between 3 and 8 per cent in other years. Annual rates as low as 2 per cent have occurred in Japan and Sweden
<ref>[http://www.bls.gov/fls/flscomparelf/unemployment.htm ''International Labor Comparisons'', United States Bureau of Labour Statistics, 2010]</ref>, but have seldom fallen below 3 per cent elsewhere. [[/Addendum#Youth unemployment- 2009 and earlier peak years|Youth unemployment rates]] of over 15 per cent, and sometimes as high as 30 percent, have occurred  in developed economies during recessions, and  have  typically been 2½ to 4 times the average rate  for all ages<ref>[http://data.un.org/Data.aspx?d=ILO&f=srID%3A30005 ''Youth unemployment, ratio of youth unemp. rate to adult unemployment rate, by sex (ILO est./MDG)'', UNdata, The United Nations]]</ref>. The percentage of the unemployed that have been out of work for at least a year  during the period 2005/8 has varied from around 10 per cent in the united States to over 50 per cent in Germany<ref>[http://data.worldbank.org/indicator/SL.UEM.LTRM.ZS ''Long-term unemployment (% of total unemployment)'', World Bank, 2009]</ref>
==The causes of unemployment==
According to the prewar consensus,  all unemployment (other than [[frictional unemployment]]) is voluntary - resulting from refusal to accept employment at the reduced rates of pay that are presumed to be available during [[recession]]s<ref> Arthur Pigou: ''The Theory of Unemployment'', London: Macmillan 1933.</ref>. Recessions were themselves deemed to be instruments of progress: for example the Harvard economist, Joseph Schumpeter, advised that
"depressions are not simply evils,... but forms of something which has to be done, namely, adjustment to change." <ref>[[Joseph A. Schumpeter]], ''[http://books.google.com/books?id=MlXr6e4Opo0C&pg=PA117 Essays on Entrepreneurs, Innovations, Business Cycles, and the Evolution of Capitalism]'' (Transaction Publishers, 1989), 117.</ref>, and United States Treasury Secretary, Andrew Mellon, told President Hoover that they serve to
"purge the rottenness out of the system"<ref>[http://krugman.blogs.nytimes.com/2007/11/07/purging-the-rottenness/ Paul Kugman: ''The Conscience of a Liberal'', New York Times November 7 2007]</ref>.
In the course of the 1940s, however, most economists came to accept the contention of [[John Maynard Keynes]] that there could be involuntary unemployment - which,  he argued<ref name=K>[http://ebooks.adelaide.edu.au/k/keynes/john_maynard/k44g/ John Maynard Keynes: ''The General Theory of Employment, Interest, and Money'',  eBooks@Adelaide, 2010]</ref>, results from a general fall in demand, brought about by an excess of planned savings over planned investment. As interpteted by his [[Keynsians|"Keynesian"]] followers, [[Keynesian theory]]  became the consensus explanation of unemployment, which was virtually unchallenged until [[Milton Friedman]] put forward a rival explanation. Friedman's contention was that temporary - and often protracted - increases  above what he termed the [[natural rate of unemployment]] were the result of the impact of  unanticipated changes in nominal demand on product and labour markets created by [[shock (economics)|shocks]] to the economy that could come from a variety of sources <ref>[http://web.cenet.org.cn/upfile/90714.pdf Milton Friedman: ''Inflation and Unemployment'', Nobel Memorial Lecture, December 13, 1976]</ref>. In particular, he attributed the [[Great Depression]] to reductions in the [[money supply]] resulting from policy mistakes by the [[Federal Reserve system|Federal Reserve Bank]]
<ref name=Friedman> Milton Friedman and Anna Schwartz ''A Monetary History of the United States 1867-1960'' (p. 289), Princeton University Press for NBER, 1963</ref>.
Labour market [[price flexibility|flexibility]]<ref>[http://www.oecd.org/dataoecd/55/25/35558438.pdf Friedrich Klau and Axe1 Mittelstadt: ''Labour Market Flexibility'', OECD]</ref>  affects  the natural rate of unemployment and  the rates  at which  unemployment falls during  recession and recovers afterwards. It is influenced in turn by employment protection legislation<ref>[http://www.oecd.org/dataoecd/8/4/34846856.pdf ''Employment Protection Regulation and Labour Market Performance'', OECD Employment Outlook,  OECD 2004]</ref>, and the nature of the socially-implied employment contract<ref>Robert M. Solow: ''The Labor Market as a Social Institution'',  Basil Blackwell, 1990</ref>.  Unemployment compensation may also increase [[frictional unemployment]] by reducing the motive for job search and, in the limiting case of the [[unemployment trap]],  can cause it to be abandoned. Employment-related taxation is also relevant: the [[tax wedge]] contributes to the employment trap and also discourages recruiting<ref>[http://www.ijf.hr/eng/FTP/2009/4/separovic.pdf A. Šeparović: ''The Influence of the Tax Wedge on Unemployment
in OECD Countries in Comparison with Croatia'', Financial Theory and Practice 33 (4), 2009]</ref>
==Policy responses==
==Policy responses==
 
Governments have been known to regard unemployment as an instrument of policy <ref> "Rising unemployment [is[ the price have had to pay to get inflation down. That price is well worth paying." Norman Lamont (then United Kongdom Chancellor of the Exchequer, Hansard 16 May 1991[http://www.publications.parliament.uk/pa/cm199091/cmhansrd/1991-05-16/Orals-1.html]</ref>, but the  policy objective has more often been the maintenance of [[full employment]]. It was formally adopted as a policy objective in the United States
==Notes and references==
<ref>[http://research.stlouisfed.org/publications/review/86/11/  C. J. Santoni: ''Employment Act of 1946: Some History Notes'', Federal Reserve Bank of St Louis, November 1986]</ref> and the United Kingdom<ref> White Paper on Employment Policy, Cmd 6527, HMSO 1944</ref> in the 1940s. Since then it has been universally adopted as an explicit or implicit requirement of [[fiscal policy| fiscal]] and [[monetary policy|monetary policy]].
{{reflist}}

Revision as of 08:12, 23 August 2010

Policy responses

Governments have been known to regard unemployment as an instrument of policy [1], but the policy objective has more often been the maintenance of full employment. It was formally adopted as a policy objective in the United States [2] and the United Kingdom[3] in the 1940s. Since then it has been universally adopted as an explicit or implicit requirement of fiscal and monetary policy.

  1. ↑ "Rising unemployment [is[ the price have had to pay to get inflation down. That price is well worth paying." Norman Lamont (then United Kongdom Chancellor of the Exchequer, Hansard 16 May 1991[1]
  2. ↑ C. J. Santoni: Employment Act of 1946: Some History Notes, Federal Reserve Bank of St Louis, November 1986
  3. ↑ White Paper on Employment Policy, Cmd 6527, HMSO 1944
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