Economic growth and development are one of the main concerns for the global society. And there are different factors that determine how good of poor an economy is, among them the unemployment rate. Whenever the subject of economic growth and development comes up, unemployment is always one of the main problems causing negative growth. During an economic peak, the rate of unemployment, among other factors, is at their lowest. And when the economy is doing bad, it is always unemployment at the top as one of the highest contributors to further deterioration.
What is unemployment?
The term unemployment may seem like an easy thing to understand. But you will be surprised to learn that there is so much to it than meets the eye. For economic students, it is crucial to understand not only what unemployment is, but it causes an effect on the general economy. There are different types of unemployment that goes beyond just being without a job. Unfortunately, this is what many people think about when they hear the term unemployment.
The best way to approach this term is by defining it as individuals are ready to work, they have all the right skills available to work, but they cannot find a job due to different factors. This is just the most basic explanation, which comprises of people, or groups of people, who don't have a job. Looking beyond this, unemployment also encompasses people in the workforce or pool of people who are ready for work, yet they don't have an appropriate job. The unemployment rate is determined by dividing the number of unemployed people by the workforce's total number. And as mentioned earlier, it serves as one of the main indicators of economic status. Good economies fight to reduce this rate to the lowest levels. Unemployment cannot be completely eliminated in any economy, but it can be significantly reduced to ensure the largest number of people are working.
The relationship between markets and households plays one of the biggest roles in economic growth. Scarcity is the biggest problem facing modern consumers, where they don't have enough resources to meet their growing demands. The industries use the raw material to produce the basic needs necessary for living a standard life. And because the production process is expensive, firms sell these products are prices that recover their input as well as make some revenues for them. This means households will still need money to access and use such products. For this to happen, they will need to find a job first and work for the items. Finding a job is not very easy, especially in the modern economies where supply for labor is on the rise, whereas demand keeps declining.
The truth is, "Unemployment" is a tricky word that can be very confusing. It is certain that it includes people who are waiting to go back to work after being discharged before. It included those who have stopped looking for a job due to various reasons, like pursue higher education, retired, disabled, or they just gave up. These are no longer included in today's definition of the term. Also, people who are not actively looking for a job, yet they would want one that is not considered in this curve.
This is why there are different categories of employment and unemployment. It is even more interesting to note that those who have not looked for a job in the past one month but have actively don't so in the past 12 months are categorized under a group called 'marginally attached to the labor force,' within which there is a category of 'discouraged workers.' Discourage ed workers are those who have just lost hope in finding any job, and hence, they are not looking for any. Many companies lay off some workers in a state of economic depression, and finding employment is not very easy. This is why some job seekers give up on their job-hunting and live freely.
The unemployment rate is often represented with so many details and inclusions, such as the one mentioned above. And therefore, some experts argue that vague and cannot be used to represent the true number of people who are not employed. They argue that there are so many people left out who jobs have jobs, yet they would love to have some because all the tiny details added in this definition. There may be some truth in this idea, especially since many experts have supported it. And for this reason, it would be a good idea to search for 'employment instead. The Bureau of Labor Statistics (BLS ) describes these terms individuals who are aged 16 and above and who have been recently put into work in the past one week and received compensation, or otherwise, due to self-employment. With this definition, everyone else who left out is considered unemployed.
Types of unemployment
Unemployment is the biggest threat to economic growth and development. As stated above, economies that seek for real growth focus on reducing it to the lowest levels possible. In the developing world, unemployment is majorly determined by the political environment of the time. This is also one of the main reasons the term becomes a bit complicated. However, in the types of unemployment, you can get a clear picture of what it really means.
Unemployment is divided into four main groups, as discussed below.
Demand deficiency unemployment
This is perhaps the most popular type of employment. Many people understand that there are not employment markets that are not demanding labor. Economies go through constant cycles where sometimes it is experiencing positive growth, and on other times it is low, experiencing negative growth. During the negative growth, markets find it hard to keep up with production costs; therefore, they cannot produce more, but less, and cannot employ; rather, they stop some workers. This is one of the biggest effects of a recession. Some market even fails, leaving their workers stranded with nowhere else to turn to.
Consider the 2008 financial markets failure the led to the Great Recession that followed. Before this, the American economy was in a bubble, especially in the housing industry. These properties' prices kept rising, which gave false indicators to financial markets that this was where good investment lay. They relaxed their lending terms and did not consider properly whether borrowers had the ability to repay the loans. And the prices dropped abruptly, making it hard for borrowers to repay the loads. Lenders were unable to recover their money from the properties because of the depreciated values. This situation led to the fall of many companies, and the effect was felt across the globe. The rate of unemployment went through the roof for the next few months.
Friction unemployment can be easily looked at as temporary unemployment for a worker who is between jobs. Consider, for instance, someone who recently quit or was fired from a company they were working for and is searching for a job in an economy that is not under a recession. This is not a bad thing because the workers that cause it are probably looking for something that suits their skills. We said above that unemployment is one of the most confusing subjects because of the many details. Hence understanding it requires that you know these terms and what they stand for.
As the name suggests, structural unemployment has to do with an organization's structure in terms of employee skills. This is when the skills set of a worker does not match the demands of the job they are doing. It can also be when the worker fails to reach the geographical region of the job. For instance, someone may find a job the requires they relocate to German, but they cannot secure a work visa due to some policy restrictions.
There are other ways through which structural employment can be affected. This includes when there is a change of organization, such as workflow automation. For instance, a tea company A in Kenya buys machines to plug tea instead of using human force. When this happens, many people will lose their jobs, and it will be hard to find another proper employment since this an unskilled labor market.
This is another type of unemployment that causes a lot of confusion. How can some who has refused to work be unemployed? This type is common when a worker quits their job because it's not financially fulfilling anymore. For instance, if one discovers that their take-home pay is less than their cost of living, they may choose to leave the work searching for something better. Many people have experienced this type of unemployment though it is most just temporary since they may have already found something better.
Full employment vs. the Natural Rate of Unemployment
Governments always struggle to make sure their citizens are employed. Economists used different measures to identify or create employment opportunities as a way to curb the harsh results of economic downturns. They define full employment or the natural rate of unemployment as a state where all unemployment is structural and frictional. A healthy economy is defined as a lot of jobs. Also, cyclical and season unemployment can be expected to be the lowest.
Friction and structural unemployment cannot be expected to hit zero at any time. It does not matter the economy is at its best times or the worst. You always find between jobs. Also, technological changes have become a common trend with modern firms, as well as firm changing locations. Hence, avoiding these two types of unemployment is almost impossible. It is crucial to get the definition of employment correctly because governments apply this rate when determining how much stimulation the economy needs. According to the Keynesian theorists, there is likely to be inflation in the economy if unemployment rates fall below the natural rate of unemployment. On the other hand, if there is a proper increase in this rate above the normal, the government risks falling into stagnation, in which case, a stimulation of the economy is recommended.
Cause of long-term unemployment
We have seen what unemployment is, and its categories, helping us gain understanding. But for better comprehension, it is critical to take at the cause of long-run unemployment. Short term unemployment is not much concern since it is easier to recover from it. There are two main factors that cause this state, as seen in empirical evidence; one if welfare payments and the other is unemployment insurance. Both of these are government assistance programs that play a substantial role in long term unemployment.
Note a negative shock in the economy majorly causes short-term unemployment. When there is a recession in the economy, a firm rush to lay-off some employees and reduce production. But as things begin to normalize, they employ again and increase production.
For long term unemployment, government assistance prompts individuals who are not working to claim that they are looking for a job, even when they are not. People who would otherwise not be taken as part of the workforce are incentivized to register. These figures are all considered the unemployment rate.
Also, the government assistance programs provided incentives, which may mean not work. An employed person has a minimum wage they can insist on getting before getting a job. This 'reservation wage' is increased insurance and other social assistance programs, which makes unemployed people hold onto their status for longer.
In the past, it was thought unemployment is costly to a jobless person, but if you don't know your calculations well, it is not as much as an issue for them.,
Unionism is another cause of unemployment in the long-run. When high union wages are above the competitive market rate, they can easily cause job losses in their economic sectors.
Unemployment is a big issue for any economy. It threatens growth and development. Even though it cannot be fully eliminated, governments should try coming up with strategies that reduce high rates.
Author: James Hamilton