Unemployment

I

INTRODUCTION

Unemployment, enforced idleness of wage earners who are able and willing to work but cannot find jobs. In societies in which most people can earn a living only by working for others, being unable to find a job is a serious problem. Because of its human costs in deprivation and a feeling of rejection and personal failure, the extent of unemployment is widely used as a measure of workers' welfare. The proportion of workers unemployed also shows how well a nation's human resources are used and serves as an index of economic activity.

II

MEASUREMENT

The most common method of measuring unemployment was developed in the U.S. in the 1930s; it is followed by many other countries on the recommendation of the International Labor Organization. In a monthly survey of a sample of households representing the entire civilian population, information is obtained about the activity of each person of working age (16 years of age or older in the U.S.). To ensure precision and ease of recollection, the interviewers ask what people were doing in a single week. A person who did any work during that week for pay or profit, worked 15 hours or more as an unpaid worker in a family business, or had a job from which he or she was temporarily absent, is counted as employed. A person who was not working but was looking for work or was on a temporary layoff and available to take a job is counted as unemployed. The number of unemployed is then divided by the number of people in the civilian labor force (that is, the sum of the employed and the unemployed) in order to calculate the unemployment rate. In the U.S., statistics for states and local areas are based partly on the same survey and partly on estimates of unemployment built up from unemployment-insurance records; these records, however, do not include all the unemployed, since many people who are seeking work are not eligible to receive unemployment compensation (see Unemployment Insurance).

In some countries, instead of a special survey, unemployment estimates are developed from data on the number of people who are looking for work through the public employment offices or the number receiving unemployment compensation payments.

III

CAUSES

Economists have described the causes of unemployment as frictional, seasonal, structural, and cyclical.

Frictional unemployment arises because workers seeking jobs do not find them immediately; while looking for work they are counted as unemployed. Friction in this case refers to the incongruity between the demand for and supply of labor. The amount of frictional unemployment depends on the frequency with which workers change jobs and the time it takes to find new ones. Job changes occur often in the U.S.: A January 1983 survey showed that more than 25 percent of all workers had been with their current employers one year or less. About a quarter of those unemployed at any particular time are employed one month later. This means that a considerable degree of unemployment in the U.S. is frictional and lasts only a short time. This type of unemployment could be reduced somewhat by more efficient placement services. When workers are free to quit their jobs, however, some frictional unemployment will always be present.

Seasonal unemployment occurs when industries have a slow season, such as construction and other outdoor work in winter. It also occurs at the end of the school year in June, when large numbers of students and graduates look for work. At its seasonal high point (January and February), unemployment in the U.S. between 1976 and 1986 was typically 20 percent higher than at the seasonal low (October).

Structural unemployment arises from an imbalance between the kinds of workers wanted by employers and the kinds of workers looking for jobs. The imbalances may be caused by inadequacy in skills, location, or personal characteristics. Technological developments, for example, necessitate new skills in many industries, leaving those workers who have outdated skills without a job. A plant in a declining industry may close down or move to another area, throwing out of work those employees who are unable or unwilling to move. Workers with inadequate education or training and young workers with little or no experience may be unable to get jobs because employers believe that these employees would not produce enough to be worth paying the legal minimum wage or the rate agreed on with the union. On the other hand, even highly trained workers can be unemployed; this happened in the U.S. in the early 1970s, for example, when the large numbers of new graduates with doctoral degrees in physics and mathematics exceeded the number of jobs available in those fields. If employers practice illegal job discrimination against any group because of sex, race, religion, age, or national origin, a high unemployment rate for these workers could result even when jobs are plentiful. Structural unemployment shows up most prominently in some cities, in some occupations or industries, for those with below-average educational attainments, and for some other groups in the labor force. In June 1992, for example, when the U.S. civilian unemployment rate was 7.8 percent, the rate in the state of New York was 9.2 percent; for teenagers 16 to 19, 23.6 percent; for black workers, 14.9 percent; and for retail workers, 9.2 percent.

Cyclical unemployment results from a general lack of demand for labor. When the business cycle turns downward, demand for goods and services drops; consequently, workers are laid off. In the 19th century, the U.S. experienced depressions roughly every 20 years. A long and severe depression occurred in the 1890s, when unemployment reached about 18 percent of the civilian labor force, and four less-severe depressions occurred in the first quarter of the 20th century. The worst depression in U.S. history was in the 1930s; at its height, one worker in four was unemployed, and some remained out of work for years. See Business Cycle.

IV

GOVERNMENT INVOLVEMENT

As a result of this depression, the U.S. government took steps to alleviate unemployment. In the mid-1930s millions of jobs were provided by public works and other special programs. Notable among the federal agencies established to carry out these programs were the Civilian Conservation Corps and the National Youth Administration, which employed young workers on a wide variety of projects; and the Work Projects Administration, which embarked on a broad program involving both public-works construction and cultural and recreational activities.

Another New Deal measure was the Social Security Act of 1935, which set up the first comprehensive social-insurance system in the U.S. (see Social Security). It introduced unemployment insurance, providing workers who lose their jobs with a weekly compensation payment. By maintaining the workers' purchasing power, unemployment insurance reduces cyclical swings in demand, thus helping trade and industry.

The enactment of various laws aimed at reviving business and industrial activity resulted in a substantial improvement in U.S. economic conditions and a decline in unemployment. Soon after the outbreak of World War II in September 1939, the U.S. government launched a program for expanding and modernizing the national defense system. The program provided industry with a powerful stimulus, and unemployment rapidly declined. After the U.S. entered the war in December 1941, not only was the goal of full employment attained, but a shortage of labor replaced the previous shortage of jobs.

In the postwar period a major new measure was passed by the Congress. The Employment Act of 1946 proclaimed that the federal government would take the responsibility for maintaining high employment levels, economic stability, and growth; that is, the government would coordinate its economic policies (such as those on taxation, expenditures, foreign trade, and control of money, credit, and banking) in such a way as to prevent serious depressions. A Council of Economic Advisers was set up to monitor the economy and provide advice to the president and Congress. Between 1945 and 1990 nine cyclical swings in unemployment occurred; all were smaller than the 1930s depression. During this period the unemployment rate was as low as 2.9 percent (1953) and as high as 9.7 percent (1982). Because of cutbacks in the unemployment insurance program and changes in the nature of employment during the 1980s, however, only 37 percent of jobless workers received benefits in 1990.

Fears that the introduction of automation and other labor-saving technology would increase unemployment have led some workers to oppose such changes. Labor-saving methods, however, increase output per worker and make possible rising levels of worker income. In order to deal with the effects of technological change, the government passed several acts, such as the Manpower Training and Development Act (1962), the Comprehensive Employment and Training Act (1973), and the Job Training Partnership Act (1982), to set up programs designed to train the unemployed in those skills in which there was employment opportunity.

A major policy issue is the relation of unemployment to inflation. In theory, when demand for labor rises to the point at which unemployment is low and employers find it difficult to hire qualified workers, wages increase, pushing production costs and prices higher and thus contributing to inflation; when demand declines and unemployment increases, inflationary pressures on wages and production costs are relieved. Confounding this theory, however, both inflation and unemployment rates were high in the 1970s. The government adopted policies to control inflation that involved reducing demand in the economy in the expectation that one of the costs of lowering inflation would be rising unemployment. Indeed, the unemployment rate rose from 5.8 percent in 1979 to 9.7 percent by 1982 before dropping back to between 5 and 7 percent in the mid- and late 1980s.

V

UNEMPLOYMENT IN OTHER NATIONS

The post-World War II period in Europe was characterized by sharp rises in unemployment resulting from the wartime destruction of many industries, the addition to the labor force of large numbers of war veterans, and a variety of consequent economic maladjustments. U.S. aid helped the highly successful efforts of Western European countries to rehabilitate their industries and provide employment for their workers (see European Recovery Program).

Most of the major nonsocialist industrialized countries had lower rates of unemployment than the U.S. by the 1950s. In the 1960s, when the U.S. unemployment rate averaged 5-6 percent, only Canada had a higher rate (7 percent); Italy had a rate of 4 percent, and all the other Western European industrial nations, as well as Japan, had rates of about 2 percent or less. Attempts to explain these disparities focused on social and economic differences among nations, including the following: the more rapid growth of the labor force in the U.S.; more years of schooling in the U.S., with many students working part-time and seeking jobs frequently; measures taken in European countries to reduce seasonal unemployment by spreading work over the year; European practices of placing youth in their midteens into apprenticeship and other work-training arrangements that promote job stability; legal restraints in some countries against laying off workers; extensive retraining programs for unemployed workers to update their skills; and greater attachment of workers to their jobs in both Europe and Japan. By early 1992 Japan's unemployment rate was still low (just over 2 percent), despite an economic slowdown, but the rate was approaching 10 percent in Britain and France and generally exceeded that rate in Eastern Europe, where formerly socialist economies were adjusting to free-market capitalism.

The Soviet Union maintained no statistics on unemployment, nor did it have unemployment insurance. Generally, workers were kept on the payroll whether or not they were needed, making for a low productivity rate. In early 1992, unemployment in Russia was reported to be less than 1 percent, but the government was opening unemployment offices, preparing for an increase as more people began working in the private sector.

In developing nations in Asia, Africa, and Latin America a much more serious and widespread problem is underemployment—that is, people are employed only part time or at work that is inefficient or unproductive, with a correspondingly low income that is insufficient to meet their needs. Much of the unemployment and underemployment in developing nations has accompanied migration from rural to larger urban centers.

In industrialized countries, with unemployment insurance and other forms of income maintenance, unemployment does not cause as great a hardship as it once did. Measures to stabilize the economy have made economic downturns briefer and less severe. Workers are still threatened by long periods of unemployment, however, and some workers bear a disproportionate burden. The problem of modern governments is how to get the benefits of economic flexibility and rising productivity while reducing the number of unemployed workers, keeping their spells of joblessness short, maintaining their income, and helping them return to work with viable skills.