Unemployment

I

Introduction

Unemployment, enforced idleness of members of the workforce 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

Measures of Unemployment

The most common method of measuring unemployment in industrialized nations derives from data on the number of people who are looking for work through the public employment offices or the number receiving unemployment compensation payments. Another method was developed in the United States in the 1930s and is followed by other countries on the recommendation of the International Labour Organization. It involves a monthly survey of a sample of households representing the entire civilian population, with information obtained about the activity of each person of working age. 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 lay-off and available to take a job is counted as unemployed. The number of unemployed people is then divided by the number of people in the civilian labour force (that is, the sum of the employed and the unemployed) in order to calculate the unemployment rate.

III

Causes of Unemployment

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. 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. A considerable degree of unemployment 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, when large numbers of students and graduates look for work.

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 trade union. On the other hand, even highly trained workers can be unemployed if there is insufficient demand for their skills. If employers practise discrimination against any group because of sex, race, religion, age, or national origin (in defiance of equal opportunity legislation), 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 labour force.

Cyclical unemployment results from a general lack of demand for labour. When the business cycle turns downward, demand for goods and services drops; consequently, workers are laid off.

A major policy issue is the relation of unemployment to inflation. In theory, when demand for labour 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—a combination known as “stagflation”.

IV

The Great Depression

The most widespread, protracted, and severe period of mass unemployment in modern times in the industrialized world was the Great Depression, which followed the Wall Street Crash in 1929. The depression left 14 million unemployed in the United States, 6 million in Germany, and almost 3 million in Great Britain. In Australia the crisis was especially severe, with over 35 per cent of the workforce being unemployed by the early 1930s, many of whom remained so until World War II. Social dislocation, widespread migration in search of jobs, and political extremism became commonplace.

The Great Depression caused substantial shifts in attitudes towards unemployment, expressed particularly in the United States in the New Deal policies of US President Franklin D. Roosevelt, who introduced social security, unemployment benefit, and public works programmes to utilize surplus labour. The economic recovery produced by these measures there demonstrated that unemployment actually worsened a depression by causing a slump in demand, and that payment of unemployment insurance was a far lesser burden to the economy than the loss of unemployed workers’ spending power. The depression also inspired John Maynard Keynes to write his greatest work of economic theory, The General Theory of Employment, Interest, and Money (1936), which stated that an economy in depression would remain so unless revived by government spending. He thus induced a tendency in Western governments to diminish unemployment by running up large budget deficits (see Keynesianism).