Tuesday, November 18, 2014

On Unemployment

To be unemployed has a strict technical meaning of people who do not have a job but are actively looking for a job. In the United States, the BLS tracks the number of people who are in the labor force but do not have a job, in a report issued every month (Krugman & Wells, 2013, p. 215).
There are multiple ways to get to that point. Even in a growing economy, people are leaving jobs all the time. There is a transition period between the time a worker leaves a job and the time they enter a new job. For example, if a worker wants job in another state, and they quit one position but the new position is not immediately forthcoming, the time the worker is in transition from the old job to the new job is a time they are technically unemployed. This is called frictional unemployment (Krugman & Wells, 2013, p. 221). Frictional unemployment is always present in the economy and not necessary and bad thing. It can mean that people are finding positions that are better fits for their skill sets.
There is more pernicious way for a worker to be unemployed. The economy works through cycles, where there are periods of growth and periods of contraction. The number of jobs available at times of growth increase and the number of jobs available as the economy shrinks decreases. Workers caught up in this “cyclical unemployment” are why the unemployment rate increase is recessions. They are jobless through the workings of firm-level responses to the business cycle. Fortunately, for the effected workers, a safety net exists to soften the blow of the job loss for those affected. For example, federal unemployment insurance was increased to 99 weeks of benefits in some states during the peak of joblessness during the most recent recession. They were able to re-enter the workforce when as the economy once again found itself on a growth track.
The worst form of unemployment is when there is a surplus of workers even during the peaks in the business cycle. This surplus is called “structural unemployment,” and can have multiple causes. The main factor is that the wage rate for whatever reason is above the equilibrium rate so that the quantity demanded of jobs is less than the quantity supplied of jobs, and there is a gap where people who would be willing workers are locked out of work. Examples of this include a minimum wage, where businesses would hire more workers at a lower rate but the statutory minimum means those potential workers find themselves without. Another example is labor unions, where in the same mechanism the negotiated rate is higher than the clearing rate, and the price floor protects the incumbents who hold the jobs at the expense of the surplus workers who would work the positions in the simple supply and demand framework (Krugman & Wells, 2013, p. 168).  


Krugman, P. & Wells, R. (2013). Macroeconomics. New York, NY : Worth Publishers