Causes and Effects of Unemployment
Causes and Effects of Unemployment Unemployment defined by the Encyclopedia Britannica is the condition of one who is capable of working, actively seeking work, but is unable to find any work. In addition, to define a person as unemployed, the person must be an active member of the labor force in search of work. (Encyclopedia Britannica, 2012) There are three different types of unemployment: frictional, structural, and cyclical. Due to various causes in the economy, there will always be a certain number of people that are frictionally or structurally unemployed.
However, cyclical unemployment only happens when an economy is in a downturn. Cyclical unemployment signifies a decrease in the GDP. Unemployment produces many unpleasant effects. Unemployment affects not only the unemployed but also society as a whole. These effects can be monetary and social. Overcoming certain barriers to job creation can help reduce frictional and structural unemployment. However, cyclical unemployment requires government intervention. Most economists believe that aggregate demand must increase to get back to full employment.
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Using Keynesian economics, government spending must increase to shift the demand curve to the right, which causes employment to rise. Overall, any type of unemployment is an issue but there are ways to reduce the unemployment rates and keep our economy at least close to full employment thus reducing the unpleasant effects of unemployment. Labor Force First, to understand unemployment, we must understand the three different categories in the labor force: employed, unemployed, and not in the labor force. Employed is a person whom has held a job within the last week or held a job but out due to a strike or illness.
Unemployed is a person who has not worked in the previous week but has attempted to find work in the last month. Not in the labor force is a person whom does not fall in the categories above. This category includes non-working spouses, students, and people who have quit looking for work. (Tim, 2011) Types and Causes of Unemployment Now that we know what the labor force consist of, we will analyze the three different types of unemployment. The three types of unemployment are frictional, structural, and cyclical. Frictional Unemployment Frictional unemployment is the type of unemployment that happens in normal economic conditions.
Frictional unemployment is the normal search time when people are changing jobs, when students graduate from college and begin their job search, or time between jobs for seasonal employees. For example, a new graduate entering the workforce or a person changing jobs may have difficulty getting information for jobs openings. On the other hand, the person may be receiving unemployment benefits from the government and they may hold out on taking a job where the pay from the job is less than their benefits. Seasonal unemployment happens when work is available only during a certain time in the year.
For example, a tobacco worker would be frictionally unemployed after the tobacco season is over. Frictional unemployment generally happens within a shorter time period than structural unemployment. (Tucker, 2008) Structural Unemployment Structural unemployment is caused by structural changes in industries. Structural unemployment happens when an employee does not have the skills that match the existing job openings. Three causes of structural unemployment are occupational immobility, geographical immobility, and technological changes. Occupational immobility is the difficulty for a person to learn a new skill to enter a new industry.
For example, a teacher may lose their job due to cuts in education spending. If the nursing field were the only jobs available, they would have to retrain to become a nurse. Geographical immobility is the difficulty for a person to relocate to new location to get a job. Due to economic factors, such as taxes and regulations on a business it may decide to move its location to somewhere that does not have any or less taxes and regulations. This causes unemployment because some people may not want to leave their current home due to costs or family ties. Technological changes lead to unemployment due to developments of labor saving technology.
This allows for less demand of the labor force in the industry. Overall, structural unemployment is the mismatch of skills of the person to the jobs available. There are numerous reasons for structural unemployment. Due to this, economists expect there will always be some level of structural unemployment. (Tucker, 2008) Cyclical Unemployment Unlike frictional and structural unemployment, cyclical unemployment is when the economy is in a downturn. Cyclical unemployment happens because employers cannot sell enough goods to keep their employees. This has a direct link with the GDP.
As the GDP goes down, the unemployment rate grows. This drop in GDP signifies a recession. (Tucker, 2008) Barriers to Job Creation Certain barriers in job creations can increase the length of time unemployment last. Three barriers to job creation are minimum wage, taxes on corporations and business, and regulatory and licensure laws. Simply put, a business or industry will create jobs where it is most cost effective and beneficial for it. Minimum wage hinders job creation because if it cost more to hire someone than the job is worth then a business will not create the job.
Taxes on business and industries can also be a barrier to job creation. If the cost becomes too high for a company it will move to or build its company at another place that is more cost efficient. This holds true for regulatory and licensure laws also. The Federal Register of Regulations sets regulations that business must follow for every employee. This keeps business owners from building their business in a location that has high regulations. It also causes business owners to hire the least number of people possible due to the hassle of all of the regulations. Fink, 2011) Effects of Unemployment As there are numerous causes of unemployment, there are numerous unpleasant effects of unemployment. The effects are both monetary and social effects. Unemployment affects not only the unemployed. It affects the entire population. Monetary Effects Government costs increase because most unemployed people receive benefits from the government. The Employment Act of 1946 gave the government the responsibility of maintaining a high employment level of labor and price stability. This government cost takes money away from being utilized in other places.
An increase in unemployment causes a decrease in the growth of the GDP. There are less people working so less goods and services are being produced. This also leads to deflationary pressures. Less money in the economy means consumers can purchase less goods and services. This causes producers to have a decrease in demand of their product. Thus, making them lower their selling price to avoid a surplus. When the producer lowers their selling price, it causes the consumer price index to fall. Social Effects When people are unemployed, various social effects can occur.
The social effects affect both our communities and the unemployed. The skills and knowledge from the unemployed is lost to our economy. This keeps our economy from reaching its full potential growth. During times of high unemployment rates, there is an increase in crime and social strife. Bruce Weinberg, associate professor of economics at Ohio State University, Eric Gould, Hebrew University, and David Mustard, University of Georgia conducted a study of the national crime rates between 1979 and 1997 and found a direct correlation in falling wages and rising unemployment rates of men without college educations. The Ohio State University, 2002) There are several private costs to an unemployed person and depending on the length of time a person is unemployed these private cost can increase. Stress over lost jobs and income can lead to health problems, family violence, drug and alcohol abuse, family breakups, and suicide. Associate Professor Maw-Der Foo, University of Colorado, and Professor Zhaoli Song, National University of Singapore, examined daily stresses felt by married couples where one spouse was employed and the other unemployed, and how that stress affected each spouse.
Professor Foo stated, “One of the key findings in this study is that couples are better at sharing their burden than helping alleviate it…Going into the study we thought that marital support might help alleviate the stress of unemployment on the family unit, but it didn’t turn out to be the case. ” (Foo, 2011) What the study ultimately found was that the spouse that was employed decreased their support to the unemployed spouse, which increased stress for the unemployed spouse. Again proving unemployment affects all members of society. Solutions to Unemployment
To begin, we need to break down the barriers to job creation. Decreasing or reforming regulations and taxes would be a good starter. A business that spends its resources to pay taxes or follow high regulations has less money to invest in its business ultimately hurting its bottom line. Greater decreases or reforms on regulations and taxes for smaller businesses would help create more even more jobs. Smaller businesses feel the affects of regulations and taxes greater than a larger business. People do not start up small businesses due to all of the regulations and taxes.
There are also public and private programs that can be put into place to help reduce structural unemployment. Examples of these programs are retraining programs for unskilled workers, paying subsidies to businesses to provide training for displaced workers, monetary programs to relocate unemployed people to where jobs are available, and programs to promote the unemployed to begin or resume their education. Making employment information more easily accessible to the unemployed would also help reduce frictional unemployment.
The internet is a wonderful tool for this; however, internet or computer access is not always readily available. Providing the unemployed access to the internet or a computer when it is not readily available to them would help get employment information to them quicker. Reducing frictional and structural unemployment is easier than reducing cyclical unemployment. To reduce cyclical unemployment, many economists believe that aggregate demand must increase. John Maynard Keynes, regarded as the father of macroeconomics, believed that an increase in non-price level determinants (ex. overnment spending) causes the demand curve to shift right leading to a higher aggregate demand, which leads to the employment level rising. (Tucker, 2008) [pic] Using Keynes theory, we can reach full employment. Full employment is not a situation where every person is employed nor is there a fixed number for full employment. Full employment is not a fixed number because it depends on the demographic makeup of the labor force. Full employment, also called the natural rate of employment, is when everyone that is willing to work has a job.
It is an economy where cyclical unemployment does not exist and the economy is achieving its potential output. (Tucker, 2008) In the Keynesian theory graph above, you can see how the economy gets closer to full employment as the aggregate demand increases. The government can monitor the situation using the GDP gap. [pic] GDP gap is used to measure the monetary loses when the nation is not at full employment. The GDP gap is the difference between what the actual GDP is and what the potential is. A positive gap signifies a positive economic situation.
This is where the economy is at or closer to full employment. A negative gap signifies a negative situation in the economy. This is when cyclical unemployment happens. As you can see in the actual and potential GDP graph above, around the 1980 to 1990 range the economy was operating at full employment. However, around the 2010 to 2012 range the economy has high rates of cyclical unemployment. When the government sees our economy headed in a negative gap, it needs to increase its spending to prevent or alleviate cyclical unemployment. This will keep the economy at its potential. Tucker, 2008) Conclusion Unemployment, whether it is frictional, structural, or cyclical, causes fundamental cost to the economy. Unemployment effects can be detrimental to the unemployed person and society as a whole. The economy loses the potential goods and services that the unemployed person could be providing. The unemployed person’s social life can be affected negatively and depending on the length of time of the unemployment, the consequences can only worsen. By breaking down the barriers to job creation, we can alleviate some frictional and structural unemployment.
Our government can help alleviate cyclical unemployment by increasing its spending which increases the aggregate demand. This helps close the GDP gap and our economy can operate at or near its potential thus reducing the detrimental effects of unemployment. References Encyclopedia Britannica. (2012). Unemployment. Retrieved December 14, from http://www. britannica. com/EBchecked/topic/614368/unemployment Fink, S. (2011, December 9). Barriers to job creation must be removed. Retrieved December 15, from http://www. delawareonline. om/article/20111210/OPINION07/112100320/Barriers-j ob-creation-must-removed Foo, M. (2011, February 21). Stresses of unemployed spouse can hurt job performance of other spouse, study finds. Retrieved December 20, from http://www. colorado. edu/news/releases/2011/02/21/stresses-unemployed-spouse-can-hurt-job-performance-other-spouse-study The Ohio State University. (2002, April 10). Higher crime rate linked to lower wages and unemployment, study finds. Retrieved December 14, from http://researchnews. osu. edu/archive//crimwage. htm Tim. (2011, April 26).
Three types of unemployment. Retrieved December 15, from http://www. faithandfinance. org/2011/04/3-types-of-unemployment-and-what-they-mean/ Tucker, I. (2008). Survey of Economics. Mason, OH: South-Western Cengage Learning ———————– Potential real GDP AD 2000 AD 2005 20 15 10 5 AD 2010 AS AD 1993 Real GDP Full Employment GDP Gap (Positive) CPI 500 1,000 1,500 2,000 Actual real GDP GDP Gap (Negative) Billions of Dollars Year 198019902000200520102012 16,000 14,000 12,000 10,000 8,000 Actual and Potential GDP, 1980- 2012 Keynesian Theory