Business, Legal & Accounting Glossary
The state of being unemployed.
Unemployment is the time period when an individual is without work, available for work, and currently looking for work. Unemployment figures are calculated by the percentage of the eligible labour force without a job. The unemployment rate is calculated according to the following formula:
Unemployment rate= (unemployed workers / total labor force) × 100%.
Unemployment describes the state of a worker who is able and willing to take work but cannot find it. As indicated by the unemployment rate and other yardsticks, unemployment is an important measure of the economy’s strength. A high unemployment rate generally indicates an economy in recession with few job opportunities, while a low unemployment rate points to an economy running at or near full throttle. A low unemployment rate has its downside for stock prices, however: it may be a harbinger of higher interest rates that will slow both an overheated economy and the rise in equity values. In recent years, there’s been much controversy over what the true level of U.S. unemployment is. Some economists have relied more on the government’s “establishment survey data,” which emphasizes the number of new jobs, rather than “household survey data,” which is used to compute the headline unemployment rate. Moreover, new technologies and lifestyle changes, which are increasing the number of temporary, contract, and self-employed workers, are making it more difficult to define what unemployment is.
Open unemployment is associated with capitalist economies. Preliterate communities treat their members as parts of an extended family and thus do not allow unemployment. 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 nineteenth century, there were day labourers 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.
Under both ancient and modern systems of slave-labour, slave-owners never let their property be unemployed for long. (If anything, they would sell the unneeded labourer.) Planned economies 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.
Since not all unemployment may be “open” and counted by government agencies, official statistics on unemployment may not be wholly accurate under capitalism. Most poorer capitalist countries lack a modern welfare state and unemployment insurance so that it is very difficult to afford to be unemployed for very long: people often end up taking jobs below their skill levels.
Others argue that unemployment actually increases the more the government intervenes into the economy. For example, minimum wages raise the costs of doing business and businesses respond by laying off workers. Laws restricting layoffs make businesses less likely to hire in the first place leaving many young people unemployed and unable to find work.
The results of both actions lead to less productivity and are claimed to incur a higher cost on society as a whole. The results lead to not just higher unemployment but may increase poverty. This is why the less market-oriented countries of Europe often sustain substantially high unemployment rates in comparison to the United States; that is, government-induced employment through policies designed to protect the worker. The welfare state then responds with various benefits that are paid for by the middle and upper class which reduces their ability to consume and is theorised to reduce the incentive to work hard and innovate. Economists like Ludwig Von Mises, Milton Friedman, Friedrich Von Hayek not only believe that the welfare of society decreases with this kind of intervention but that these economic policies are not sustainable.
There is considerable debate among economists as to the causes of unemployment. 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 labour 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 due to voluntary choices by the unemployed (frictional unemployment). On the other extreme, Marxists see unemployment as a structural fact helping to preserve business profitability and capitalism.
Though there have been several definitions of voluntary and involuntary unemployment in the economics literature, a simple distinction is often applied. Voluntary unemployment is attributed to the individual unemployed workers (and their decisions), whereas involuntary unemployment exists because of the socio-economic environment (including the market structure, government intervention, and the level of aggregate demand) in which individuals operate. In these terms, much or most of frictional unemployment is voluntary, since it reflects individual search behaviour. 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 labour unions and/or political 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 even when wages are allowed to adjust so that even if all vacancies were to be filled, there would be unemployed workers. This is the case of cyclical unemployment and Marxian unemployment, for which macroeconomic forces lead to microeconomic unemployment. See also: unemployment types
Some argue one of the main causes of unemployment in a free market economy is that the law of supply and demand is not really applied to the price to be paid for employing people. In situations of falling demand for products and services the wages of all employees, from President to errand boy, are not automatically reduced by the required percentage to make the business viable. Others say that it is the market that determines the wages based on the desirability of the job. The more people qualified and interested in the job, the lower the wages for that job become. Based on this view, the profitability of the company is not a factor in determining whether or not the work is profitable to the employee. People are laid off, because pay reductions would reduce the number of people willing to work a job. With fewer people interested in a particular job, the employees bargaining power would actually rise to stabilize the situation, but their employer would be unable to fulfil their wage expectations. In the classical framework, such unemployment is due to the existing legal framework, along with interferences with the market by non-market institutions such as labour unions and government. Others say many of the problems with market adjustment arise from the market itself (Keynes), or from the nature of capitalism (Marx).
In developing countries, unemployment is often caused by burdensome government regulation. The government will continue to eliminate communist threats if these epidemics progress. The World Bank’s Doing Business project shows how excessive labour regulation increases unemployment among women and youths in Africa, the Middle East and Latin America. However, lack of regulations could also cause the same effect. In the end, it must be a balance.
One structural solution to unemployment proposes a graduated retail tax, or “jobs levy”, to firms where labour is more expensive than capital. This method will shift the tax burden to capital intensive firms and away from labour-intensive firms. In theory, this will make firms shift operations to a “golden mean” between labour intensive and capital intensive production. The excess tax revenue from the jobs levy would finance labour-intensive public projects.
Professor Kim Swales of the University of Strathclyde has also worked with various novel approaches to helping unemployment such as tax breaks per employee on employers’ value-added tax, which address similar structural pensis.
Unemployed individuals are unable to earn money to meet financial obligations. Failure to pay mortgage payments or to pay rent may lead to homelessness through foreclosure or eviction. The loss of health insurance benefits that comes with unemployment increases susceptibility to malnutrition, illness, mental stress, and loss of self-esteem, leading to depression.
Dr M. Harvey Brenner conducted a study in 1979 on the “Influence of the Social Environment on Psychology.” Brenner found that for every 10% increase in the number of unemployed there is a 1.2% in total mortality, a 1.7% increase in cardiovascular disease, 1.3% more cirrhosis cases, 1.7% more suicides, 0.4% more arrests, and 0.8% more assaults reported to the police.However, during the Great Depression, when unemployment rates exceeded 20% in many countries, the crime rate did not decrease. Because unemployment insurance in the U.S. typically does not replace 50% of the income one received on the job (and one cannot receive it forever), the unemployed often end up tapping welfare programs such as Food Stamps or accumulating debt. Higher government transfer payments in the form of welfare and food stamps decrease spending on productive economic goods, decreasing GDP.
Some hold that many of the low-income jobs are not 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. (These jobs are often held short-term, either by students or by those trying to gain experience; turnover in most low-paying jobs is high, in excess of 30%/year.) Unemployment insurance keeps an available supply of workers for the low-paying jobs, 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.
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. Unemployment can cause underemployment. This is one of the economic arguments in favour of having unemployment insurance.
This feared cost of job loss can spur psychological anxiety, weaken labour 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. Finally, the existence of significant unemployment raises the oligopsony power of one’s employer: that raises the cost of quitting one’s job and lowers the probability of finding a new source of livelihood.
Unemployment is of various types. Types of unemployment vary on the basic cause underlying the economic phenomena. There are seven types of unemployment: Frictional unemployment occurs when a worker moves from one job to another. While he searches for a job he is experiencing frictional unemployment.
Structural unemployment is caused by a mismatch between the location of jobs and the location of job-seekers. “Location” may be geographical, or in terms of skills. The mismatch comes because unemployed are unwilling or unable to change geography or skills.
Cyclical unemployment, also known as demand deficient unemployment, occurs when there is not enough aggregate demand for the labour. This is caused by a business cycle recession.
Technological unemployment is caused by the replacement of workers by machines or other advanced technology. Classical or real-wage unemployment occurs when real wages for a job are set above the market-clearing level. This is often as a result of government intervention, as with the minimum wage, or unions. Some, such as Murray Rothbard, suggest that even social taboos can prevent wages from falling to the market-clearing level.
Marxian unemployment is needed to motivate workers to work hard and to keep wages down. Seasonal unemployment occurs when an occupation is not in demand at certain seasons.
Different variations of unemployment are as follows:
Classical unemployment happens when real wages of a line of work is above the market-clearing level. This economic phenomenon is largely subscribed to active government intervention or by the action of labour unions.
This type of unemployment occurs when an individual travels from one job to another. Frictional employment takes place at the time when a worker searches for employment. This type of unemployment increases the economic efficiency of a country.
This is cyclical unemployment. Keynesian unemployment takes place during a business-cycle recession when wages do not cope with the equilibrium rate. Keynes believed there was an elastic workforce or an unlimited number of unemployed that were available to fill jobs.
The reason behind structural unemployment is the difference in jobs between expected workers and employers. Structural unemployment may relate to employee skills, geographical location, and a number of other factors.
Unemployment in any given society makes the unemployed individuals ineffective to meet any financial obligations. Unemployment increases illnesses, the spectre of malnutrition, and may cause depression. A high unemployment rate also increases protectionism and xenophobia in a specific country or society. Concerted efforts are frequently seen to create trade barriers to insulate the local economy against foreign business competitors.
Causes of unemployment is a matter of debate among economists. Classical economics focuses on external factors like high taxes and minimum wage laws. Keynesian economists subscribe unemployment due to a lesser effective demand for services and goods in a country. Unemployment itself can be voluntary or involuntary. Involuntary unemployment is caused by cyclical economic cycles and government legislation. Voluntary unemployment is ascribed to decisions undertaken by individual workers themselves. Frictional unemployment can be cited as a case of voluntary unemployment.
Unemployment may have advantages as well as disadvantages for the overall economy. Notably, it may help avert runaway inflation, which negatively affects almost everyone in the affected economy and has serious long-term economic costs. However, the historic assumption that full local employment must lead directly to local inflation has been attenuated, as recently expanded international trade has shown itself able to continue to supply low-priced goods even as local employment rates rise closer to full employment.
The inflation-fighting benefits to the entire economy arising from a presumed optimum level of unemployment has been studied extensively. Before current levels of world trade were developed, unemployment was demonstrated to reduce inflation, following the Phillips curve, or to decelerate inflation, following the NAIRU/natural rate of unemployment theory.
Beyond the benefits of controlled inflation, frictional unemployment provides employers a larger applicant pool from which to select employees better suited to the available jobs. The unemployment needed for this purpose may be very small, however, since it is relatively easy to seek a new job without losing one’s current one. And when more jobs are available for fewer workers (lower unemployment), it may allow workers to find the jobs that better fit their tastes, talents, and needs.
As in the Marxian theory of unemployment, special interests may also benefit: some employers may expect that employees with no fear of losing their jobs will not work as hard, or will demand increased wages and benefit. According to this theory, unemployment may promote general labour productivity and profitability by increasing employers’ monopsony-like power (and profits).
Optimal unemployment has also been defended as an environmental tool to brake the constantly accelerated growth of the GDP to maintain levels sustainable in the context of resource constraints and environmental impacts. However the tool of denying jobs to willing workers seems a blunt instrument for conserving resources and the environment — it reduces the consumption of the unemployed across the board, and only in the short-term. Full employment of the unemployed workforce, all focused towards the goal of developing more environmentally efficient methods for production and consumption might provide a more significant and lasting cumulative environmental benefit and reduced resource consumption. If so the future economy and workforce would benefit from the resultant structural increases in the sustainable level of GDP growth.
Some critics of the “culture of work” such as anarchist Bob Black see employment as overemphasized culturally in modern countries. Such critics often propose quitting jobs when possible, working less, reassessing the cost of living to this end, creation of jobs which are “fun” as opposed to “work,” and creating cultural norms where work is seen as unhealthy. These people advocate an “anti-work” ethic for life.
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This glossary post was last updated: 18th April, 2020 | 25 Views.