Causes of Unemployment

 

We have seen that unemployment varies across times and places.  We can also notice that the unemployment rate never falls to zero but tends to bottom out around 5%.  That level of unemployment is called the Natural Rate of Unemployment or Full Employment.

The normal functioning of an economy brings about a certain level of unemployment based on  economic, social, and political factors that exist at a time.

Structural Unemployment

Because the economy is constantly experiencing changes in technology or consumer preferences, the demand for various labor skills changes as well and unemployment may rise is some sectors. This describes Structural unemployment.  For example, with the popularity of tax preparation programs such as Turbo Tax, the demand for tax preparers has fallen sharply resulting in structural unemployment in that sector.

Recently, new technologies have put lower skilled employees out of work, but at the same time they create demand for higher skilled workers to use the new technologies. Education and retraining seems to be the key in minimizing the amount of structural unemployment.

Frictional Unemployment

Economies are dynamic; new firms are created, existing ones go bankrupt, people move to new places, change career, go back to school; so there will always be simultaneous job losses and job openings.  It also takes time to match jobs to workers; so at any point in time, there will always be workers in transitions, unemployed.  This describes Frictional Unemployment.

 Frictional unemployment is not inherently a bad thing.  For individuals and companies to be successful and productive, you want people to find the job for which they are best suited, not just the first job offered.

In the mid-2000s, before the recession of 2008–2009, it was true that about 7% of U.S. workers saw their jobs disappear in any three-month period. But in periods of economic growth, these destroyed jobs are counterbalanced for the economy as a whole by a larger number of jobs created. In 2005, for example, there were typically about 7.5 million unemployed people at any given time in the U.S. economy.

The frictional unemployment that results from people moving between jobs in a dynamic economy may account for one to two percentage points of total unemployment.  The level of frictional unemployment will depend on how easy it is for workers to learn about alternative jobs and to some extent on how willing people are to move to new areas to find jobs.

Cyclical Unemployment

The last type of unemployment is linked to the fluctuations in the macroeconomy.

 If firms believe that business is expanding, then at any given wage they will desire to hire a greater quantity of labor. Conversely, if firms perceive that the economy is slowing down or entering a recession, then they will wish to hire a lower quantity of labor at any given wage. The variation in unemployment caused by the economy moving from expansion to recession or from recession to expansion (i.e. the business cycle) is known as cyclical unemployment.

Natural Unemployment and Potential Real GDP

The natural unemployment rate is related to two other important concepts: full employment and potential real GDP. The economy is considered to be at full employment when the actual unemployment rate is equal to the natural unemployment. When the economy is at full employment, real GDP is equal to potential real GDP. By contrast, when the economy is below full employment, the unemployment rate is greater than the natural unemployment rate and real GDP is less than potential. Finally, when the economy above full employment, then the unemployment rate is less than the natural unemployment rate and real GDP is greater than potential. Operating above potential is only possible for a short while, since it is analogous to all workers working overtime.

The Natural Rate of Unemployment in Recent Years

The underlying economic, social, and political factors that determine the natural rate of unemployment can change over time, which means that the natural rate of unemployment can change over time, too.

Estimates by economists of the natural rate of unemployment in the U.S. economy in the early 2000s run at about 4.5 to 5.5%. This is a lower estimate than earlier. Three of the common reasons proposed by economists for this change are outlined below.

The Internet has provided a remarkable new tool through which job seekers can find out about jobs at different companies and can make contact with relative ease. An Internet search is far easier than trying to find a list of local employers and then hunting up phone numbers for all of their human resources departments, requesting a list of jobs and application forms, and so on. Social networking sites such as LinkedIn have changed how people find work as well.
The growth of the temporary worker industry has probably helped to reduce the natural rate of unemployment. In the early 1980s, only about 0.5% of all workers held jobs through temp agencies; by the early 2000s, the figure had risen above 2%. Temp agencies can provide jobs for workers while they are looking for permanent work. They can also serve as a clearinghouse, helping workers find out about jobs with certain employers and getting a tryout with the employer. For many workers, a temp job is a stepping-stone to a permanent job that they might not have heard about or gotten any other way, so the growth of temp jobs will also tend to reduce frictional unemployment.
The aging of the “baby boom generation”—the especially large generation of Americans born between 1946 and 1963—meant that the proportion of young workers in the economy was relatively high in the 1970s, as the boomers entered the labor market, but is relatively low today. As noted earlier, middle-aged workers are far more likely to keep steady jobs than younger workers, a factor that tends to reduce the natural rate of unemployment.

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