Unemployment: Causes, and Consequences - Essay Example

Introduction Unemployment is a serious macroeconomic problem and a major cause of poverty in society. According to the Bureau of Labor Statistics (BLS) the unemployment rate in the month of March, 2014 was 6.7% of the labor force. The International Labor Organization defines unemployment as “those without work, are currently available for work, and are actively seeking work (White & Smith 102). To qualify as long-term unemployed, these people must have been unemployed for twenty-seven weeks. This paper will discuss the causes and consequences of unemployment. In order to understand the problem of unemployment, it is important to define the main concepts used. According to BLS, those who are qualified for employment are those civilians aged 16 years and above. The employed are those aged 16+ and were working for pay during the survey period or those who did at least 15 hours unpaid work in family owned enterprises. The unemployed on the other hand, refer to those who did not have a job but had been actively looking for work four weeks prior to survey and are currently available to work. The labor force comprises all those employed and unemployed and these amounted to 155 million people out of U.S population of approximately 315 million people in 2013 (BLS, nap). Those not looking for a job such as the retired or schooling are not part of the labor force since they are neither employed nor unemployed. For those who are involuntarily unemployed, they receive government benefits in the form of unemployment insurance (UI) to compensate for lost income (Bakke 734). However, the voluntarily unemployed comprising of those dismissed for gross misconduct, those who leave work without a good cause, and those who refuse to work do not qualify for UI. The UI eligibility rules also exclude independent contractors, self-employed and agricultural laborers. The basic duration of regular state benefits in U.S is 26 weeks (737). The problem with these definitions is that they ignore those who have given up looking for work but are willing to work and also those in part-time employment and would like to engage in full-time employment as they are counted as employed. Furthermore, the BLS telephone surveys which are carried out every month do not consider those who do not have telephones especially the poor hence they may not be representative of the population. However, over time the results reflect what is happening in the economy and now the big question is; what causes unemployment? One of the major factors that cause unemployment is the economic cycles. Research indicates that unemployment falls during periods of economic prosperity and rises during recessions. For example, a BLS historical picture of the United States unemployment from 1929-2001 shows that the highest levels of unemployment (20-25%) was experienced during the Great Depression of 1930s. The rates fell during WWII as the economy prospered due to war spending to 2% and remained at low levels up to 1960s and rose again during recessions of 1970s to early 1990s. The 1990s economic expansion lowered the rates to 4% in 2000 down from 7.5% in 1992 and rose gain in 2001 due to recession reaching a level of 6% in 2003 (Bakke 729). During the subprime mortgage crisis and economic recession of 2007, the U.S unemployment rates rose from 5% in January 2008 to a peak of 10% in October 2009 before falling to 6.7% in 2013 (Federal Reserve Database). This is because during recession, economic growth is low meaning that the aggregate demand is low hence low output and employment. However, when the economy recovers from recession, economic growth accelerates leading increased aggregate demand and consequently high output and employment. More over, they financial institutions tighten credit during recession leading to low investments and consequently mass lay-offs. This accelerates the rate of unemployment in the economy. However, Dynan, Skinner and Zeldes argue that economic growth does not necessarily result to employment due to income inequalities, rather, the rich save more (399-400). This results in low investment and unemployment (little or no job creation). Demographics are also viewed as causes of unemployment. The U.S population is composed of the Baby Boomers and the aging population and these are vulnerable to unemployment. The aging population is nearing retirement while the Baby Boomers have a low labor force participation rate due to lack of skills or their age does not allow working. As such, the labor force participation in the U.S has been generally declining over the years. According to BLS monthly employment situation summary, the unemployment rates as per September 2012 were 7.3% for adult men, 7.0% for women and 23.7% for teenagers (BLS 2014). The women participation rate has been growing as more women enter the labor force. While unemployment is often regarded as the cause of poverty, poverty can also cause unemployment. According to Bakke, the poor people often lack transport to go to work and as a result they often miss work hence they can easily lose their jobs. Most of these people especially women cannot afford child care to allow them to go to work hence become unemployed every time they have to take care of children or engage in part-time employment to balance work and family life. Others do not access to medical care or healthy food hence health problems that hinder them from active employment and still others are homeless and as such difficult for them to find jobs since they do not have permanent address or phone number. She also asserts that poor people perform poorly in school and are prone to high school dropout rates thus lowering their chances of progressing in life. Furthermore, their schools lad behind as they cannot afford high quality teachers to produce students with high employable skills (731). Related to poverty is education and training. Those with high level of education get jobs easily thus they have low unemployment rates while those with low education experience high unemployment rates. Training is also necessary to acquire the necessary skills required in the world of employment. According to Krugman, worker participation in the labor unions is essential in lowering rates of unemployment as employees have some degree of job security due to negotiation power (nap). However, union membership has been declining over the years and this is likely to result to high unemployment. The BLS indicates that union membership declined from 11.8% in 2011 to 11.3% in 2012. Another major factor contributing to high unemployment in the U.S is globalization. The world has become so interconnected that even labor has no boundaries. Most U.S firms engage in outsourcing goods and off-shoring jobs in low wage countries in Asia and developing countries leading to high unemployment in U.S especially for the youth. A cross-country comparison of Organization for Economic Co-operation and Development (OECD) countries showed that the U.S and Canada had twice as high unemployment rate as in European low-unemployment countries such as Norway, Sweden and Austria from 1973-1990 (White & Smith 101). Most of the jobs off-shored are in the manufacturing and service sector. Unemployment is not only costly for the economy due to the high UI benefits payments and lost tax revenue but also to unemployed individuals, their families and the community as a whole. According to Bakke who accompanied the unemployed in their job searches and observed their sufferings, it is “a life-altering experience for workers whose very identities were wrapped up in work” (727). She regards it as painful and humiliating as such people overstretched the available resources and relied on borrowing from friends and relatives or public assistance. Moreover, it leads to family disorganization as the male breadwinner is displaced by other members of the family such as the wife. If extended for a long time, it leads to loss of the only source of income which is government benefits. Unemployment therefore, is a leading cause of poverty in society. It also leads to psychological problems for those affected. Conclusion Unemployment is a very serious problem in the society and a major cause of poverty. It refers to those who do not have jobs but had previously been employed, are available to work and are actively seeking a job but cannot find one. Those who are not actively searching for a job are thus not considered unemployed. It is measured as a percentage of total labor force (unemployed plus employed) of those aged 16 years and above. As of March 2014, unemployment rate in the U.S was 6.7%. The major causes of unemployment include: economic cycles, poverty, globalization leading to outsourcing and off-shoring, education and training as well as demographics. Unemployment causes poverty and disorganization in the society as people struggle to survive and also psychological problems. The government can solve this problem by employing quality teachers and also stimulating demand in the economy. Annotated Bibliography Bakke, E. Wight. The Unemployed Workers and Citizens without Work. In: Gwendolyn, Mink and Alice O’Connor (eds). Poverty in the United States: An Encyclopedia of History, Politics and Policy. Santa Barbara, CA: ABC-CLIO, 2004. Print. Gwendolyn is the author of an award winning book: Welfares End and the Wages of Motherhood: Inequality in the Welfare state which won Victoria Schuck Book Award. He is from the American political science association while O’Connor is an assistant professor at California University and an author of many books. The book comprises the work of different contributors hence a wealth of experience and excellent material. This chapter is written by E. Wight Bakke a sociologist and professor of economics at Yale University. She gives a detailed account of the relationship between poverty and unemployment and concludes that poverty is caused by unemployment as much as unemployment is caused by poverty. Federal Reserve Database. Economic Research. Web. April 15, 2014. http://www.research.stlouisfed.org/freds/series/ The Federal Reserve Database is a website of the Federal Bank of St. Louis and offers a variety of employment statistics organized as data series. It also generates charts and downloads historical information about labor force, employment, civilian unemployment rate as a percentage of labor force, Unemployment in thousands of persons, civilian labor force participation and population data among others. Dynan, Karen E., Jonathan Skinner and Stephen P Zeldes. Do the Rich Save more? Journal of Political Economy, 112.2 (2004): 397-444. Dynan is a member of Federal Reserve Board, Skinner and Zeldes belong to the National Bureau of Economic Research. Their work is based on primary data collected from a panel study of income dynamics, survey of consumer finances, and consumer expenditure survey. Having a wide experience in economics, their work is credible and is a reflection of the connection between lifetime income and savings rates. They concluded that the rich do save more than low-income earners hence wealth inequality can result in unemployment. Krugman Paul. The Conscience of a Liberal. New York, NY: W.W.Norton, 2007. Krugman is a great economist and a 2008 Nobel Prize winner in economics. He is an author, columnist, and a blogger for the New York Times. He was also a professor of economic and international affairs at Princeton University. He gives a detailed account of the American economy and politics with a focus on inequalities. He argues for liberalism as a solution to all inequalities hence the important role of labor unions and social programs. U.S Department of labor, Bureau of Labor Statistics. Labor Force Statistics from the Current Population Survey. Web. April 15, 2014. Http://data.bls.gov/timeseries/LNS14000000 The U.S Bureau of Statistics is a department of labor website that provides statistics on essential employment dynamics. The Bureau conducts monthly surveys and publishes results on unemployment rates, labor union participation, and other monthly employment situation summaries. White, Michael and Smith David J. Causes of Persistently High Unemployment. In: Anne c Peterson and Jeylan T. Mortimer (eds). Youth Unemployment and Society. New York: Cambridge University Press, 2006. pp 95-146. Peterson is a former Dean of Graduate School and a senior vice president at Kellogg foundation while Mortimer is based at University of Minnesota Department of Sociology. Their book comprises of collection of work from different authors as they sought to examine trends in youth unemployment and intervention strategies in U.S and Europe using OECD countries. This chapter is authored by White and Smith who are based in the Policy Studies Insitute in London. They give a cross-national comparison of unemployment and the reasons for such disparities. They conclude that youth unemployment is a reflection of high unemployment overall. Read More