In economics, a person who is able and willing to work yet is unable to find a job is considered unemployed. The unemployment rate measures the number of unemployed workers as a proportion of the total civilian labor force, where the latter includes both the unemployed and those with jobs (all those willing and able to work for pay). Though most people care about the number of unemployed (8.2 million in the U.S. in April 2004), economists typically focus on the unemployment rate (5.6 percent). This corrects for the normal increase in the number of people working for pay or seeking work due to population increases and increases in the paid labor force relative to the population -- and thus the normal increase in the number of unemployed workers.
It's important to note that these statistics are averages for the entire U.S. economy, hiding variations among groups. For April 2004 in the U.S., the unemployment rates for the major worker groups were as follows:
adult men: 5.0 percent;
adult women: 5.0 percent;
teenagers: 16.9 percent;
whites: 4.9 percent;
blacks: 9.7 percent;
Hispanics or Latinos: 7.2 percent;
Asians: 4.4 percent.
These percentages represent the usual rough ranking of these different groups' unemployment rates, though the absolute numbers normally change over time, with the business cycle. They come from the Bureau of Labor Statistics. (Clicking on this link will give up-to-date numbers.)
Some hold that many of the low-income jobs (such as McJobs) aren't really a better option than unemployment with a welfare state (with its unemployment insurance benefits). But since it is difficult or impossible to get unemployment insurance benefits without having worked in the past, these jobs and unemployment are more complementary than they are substitutes. Unemployment insurance keeps an available supply of workers for the McJobs, 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 discussed below.
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 do not fit their skills or allow them to use their talents. That is, unemployment can cause underemployment (definition 1). This is one of the economic arguments in favor of having unemployment insurance.
Second, unemployment makes the employed workers more insecure in their jobs, worrying about being replaced, as Alan Greenspan of the U.S. Federal Reserve has suggested. 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 discussed below.
Finally, high unemployment implies low real Gross Domestic Product: we are not using our resources as completely as possible and are thus wasting our opportunities to produce goods and services that allow people to survive and to enjoy life. Much unemployment -- called deficient-demand or cyclical unemployment -- thus represents a profound form of inefficiency, sometimes called "Keynesian inefficiency." (However, this loss of production might instead be caused by classical unemployment or Marxian unemployment, which reduce potential output by restricting supply.) Okun's Law tells us that for the U.S., the economy misses out on about two percent of its potential output for each one percentage point of unemployment above the "full employment" unemployment rate or NAIRU (see below). Alternatively, this "law" says that as unemployment rises by one percentage point, say from 5% to 6% of the civilian labor force, the percentage of potential output that could have been produced but was not rises by about two points.
Some say that slow economic growth and the resulting unemployment are actually good, since the constantly needed growth of the GDP cannot be sustained forever, given resource constraints and environmental impacts. But others ask if is it fair to burden the unemployed (usually those at the bottom of the economic heap) with the costs of limiting the use of resources and the abuse of the environment. This suggests that we should seek ways to improve the efficiency of our resource management and environmental stewardship to attain growth and low unemployment in order to make sure that the burdens are distributed fairly.
Open unemployment of the sort defined above is associated with capitalist economies. Preliterate ("primitive") communities treat their members as parts of an extended family and thus do not allow them to be unemployed -- in the effort to preserve the group. In precapitalist societies such as European feudalism, the serfs (though clearly dominated and exploited by the lords) were never "unemployed" because they had direct access to the land (and the needed tools) and could thus work to produce crops. Just as on the American frontier during the 19th 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.
In other societies, slave-owners never let their property be unemployed for long. (If anything, they would sell the unneeded laborer.) Planned economies (often called "communist countries") 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 -- do not let their members become unemployed unless the co-op itself goes bankrupt.
On the other hand, under capitalism the individual profit-seeking employer does not have to bear the complete social costs of laying off or firing workers, so they are willing to live with (or even profit from) the existence of unemployment -- unless employees are able to win good severance packages or protection from the government (such as restrictions on firing and lay-offs). (That is, there is a market failure due to the external costs of laying people off or firing them.) On the "supply side," workers' lack of significantly positive net worth (beyond equity in a home or a car) makes it very difficult for them to go into business for themselves to avoid unemployment. Economist Edward Wolff estimates that in 1995 in the U.S., families with adults aged 25-45 in the middle income quintile could sustain their current consumption for only 1.2 months (or live at 125% of the poverty standard for 1.8 months) based on their financial reserves. Poorer quintiles of course had more difficulty.
There is considerable debate amongst economists as to what the main causes of unemployment are. 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 labor markets (structural unemployment). Classical or neoclassical economics tends to reject these explanations, and focuses more on rigidities imposed on the labour 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 voluntary for the unemployed (frictional unemployment). On the other extreme, Marxists see unemployment as a structural fact helping to preserve capitalism and business profitability (Marxian unemployment). The different perspectives may be right in different ways, contributing to our understanding of different types of unemployment.
Though there have been several definitions of voluntary (and involuntary) unemployment in the economics literature, a simple distinction is applied here. Voluntary unemployment is blamed on the individual unemployed workers (and their decisions), whereas involuntary unemployment exists because of the socio-economic environment (including the market structure) in which individuals operate. (As is usual in economics, the sociological or social-psychological factors that help determine individual choices are ignored here.) 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 labor 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, so that even if all vacances were to be filled, there would be unemployed workers.
In this case, the number of unemployed workers exceeds the number of job vacancies, so that if even all open jobs were filled, some workers would remain unemployed. This the kind of unemployment coincides with unused industrial capacity (unemployed capital goods). Keynesian economists see it as possibly being solved by government deficit spending or by expansionary monetary policy, which aims to increase non-governmental spending by lowering interest rates.
This type of unemployment coincides with an equal number of vacancies and cannot be solved using aggregate demand stimulation. The best way to lower this kind of unemployment is to provide more and better information to job-seekers and employers, perhaps through job-banks in centralized computers (as in some places in Europe). In theory, an economy could also be shifted away from emphasizing jobs that have high turnover, perhaps by using tax incentives or worker-training programs.
But some frictional unemployment is beneficial, since it allows workers to get the jobs that fit their wants best and the employers to find employees who promote profit goals the most. It is a small percentage of the unemployment, however, since workers can often search for new jobs while employed. Similarly, employers can seek new employees before firing current ones.
One kind of frictional unemployment is called wait unemployment: it refers to the effects of the existence of some sectors where employed workers are paid more than the market-clearingequilibrium wage. Not only does this restrict the amount of employment in the high-wage sector, but it attracts workers from other sectors who wait to try to get jobs there. The main problem with this theory is that such workers will likely "wait" while having jobs, so that they are not counted as unemployed. In Hollywood, for example, those who are waiting for acting jobs also wait on tables in restaurants for pay (while acting in "Equity Waiver" plays at night for no pay). However, these workers might be seen as underemployed (definition 1).
Structural unemployment is hard to separate empirically from frictional unemployment, except to say that it lasts longer. It is also more painful, encouraging people to fall into the vicious cycle of poverty. As with frictional unemployment, simple demand-side stimulus will not work to easily abolish this type of unemployment. Some sort of direct attack on the problems of the labor market -- such as training programs, mobility subsidies, or anti-discrimination policies -- seems required. These policies may be reinforced by the maintenance of high aggregate demand, so that the two types of policy are complementary.
Structural unemployment may also be ecouraged to rise by persistent cyclical unemployment: if an economy suffers from long-lasting low aggregate demand, it means that many of the unemployed become disheartened, while finding their skills (including job-searching skills) become "rusty" and obsolete. Problems with debt may lead to homelessness and a fall into the vicious circle of poverty. This means that they may fit the job vacancies that are created when the economy recovers. Some economists see this scenario as occurring under British Prime Minister Margaret Thatcher during the 1970s and 1980s. The implication is that sustained high demand may lower structural unemployment. However, it also may encourage inflation, so some kind of incomes policies (wage and price controls) may be needed, along with the kind of labor-market policies mentioned in the previous paragraph. (This theory of rising structural unemployment has been referred to as an example of path dependence or "hysteresis.")
Much technological unemployment (e.g. due to the replacement of workers by robots) might be counted as structural unemployment. Alternatively, technological unemployment might refer to the way in which steady increases in labor productivity mean that fewer workers are needed to produce the same level of output every year. The fact that aggregate demand can be raised to deal with this problem suggests that this problem is one of cyclical unemployment. As indicated by Okun's Law, the demand side must grow sufficiently quickly to absorb not only the growing labor force but also the workers made redundant by increased labor productivity. Otherwise, we see a jobless recovery such as those seen in the United States in both the early 1990s and the early 2000s.
Seasonal unemployment might be seen as a form of structural unemployment, since it is a type of unemployment that is linked to certain kinds of jobs (construction work, migratory farm work). Most official unemployment measures erase the this kind of unemployment from the statistics using "seasonal adjustment."
As Karl Marx noted (and Michal Kalecki emphasized), a certain amount of unemployment -- the reserve army of the unemployed -- is normally needed in order to maintain work discipline in jobs, keep wages down, and protect business profitability. If profitability suffers a sustained depression, capitalists can and will punish people by imposing a recession via their control over investment decisions (a capital strike). To the Marxian school, these strikes are rare, since in normal times the government, responding to pressure from their most important constituencies, will encourage recessions before profits are hurt.
To Marxists, this kind of unemployment cannot be abolished without abolishing capitalism as an economic system (or running capitalism using a fascist state, under which profitability is protected by the direct use of force).
As with cyclical and classical unemployment, unemployment exceeds the availability of vacancies. (It's the scarcity of jobs that gives unemployment such a motivational effect.) However, simple demand stimulus in the face of a capital strike (refusal to invest) simply encourages inflation: if profits are being squeezed, the only way to maintain high production is via rising prices.
