Public Administration: Unemployment Economic Impact

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Table of Contents

Introduction
Problems with the unemployment rate
Discouraged and marginally attached workers
Underground economy
Criminal activities
Impact of the unemployment rate on the economy of United States
Conclusion
References

Introduction

Unemployment is a major social and economic problem. As per the International Labor Office’s (ILO) definition, a person is considered to be in a state of unemployment when he/she “does not have a job, is available for work, and is actively looking for work” (Disqus, 2010).

The U.S Department of Labor takes into account the above definition of unemployment while calculating the nation’s jobless rate. The “official” unemployment rate is released by the U.S government every month. This “official” unemployment index is indicative of the nation’s employment situation (Helpman, 2010).

However, many believe that the “official” unemployment rate released by the U.S government is not a correct reflection of the actual state of unemployment in the nation. The situation is much grimmer. This is because the unemployment index released by the U.S government considers only those persons to be unemployed who have reportedly been looking for job for the past four weeks. This approach of the U.S Department of Labor has been widely criticized as it “dramatically understates the true number of unemployed (and underemployed) people” (DM, 2010).

This paradoxical situation can be explained with the help of the fact that the U.S government’s Bureau of Labor Statistics releases six different numbers relating to the nation’s unemployment rate every month namely “U-1, U-2, U-3, U-4, U-5 and U-6” (DM 2010). Of these, U-3 is the “official unemployment rate” (DM, 2010). But, the U-6 number is more accurate in the sense that it takes into account those sections that are generally not considered by the U.S government while calculating the unemployment index. These sections include the “under-employed, part-time, temporary, discouraged workers, underground economy” (Ehmke, 2010) etc.

Problems with the unemployment rate

As per the unemployment numbers released by the U.S government in the month of July, 2010, the “official” unemployment rate stands at 9.6%. However, many are of the opinion that the unemployment numbers provided by the Bureau of Labor Statistics are frictional numbers. The real unemployment rate is much higher and is a reflection of the rising tide of unemployment in the nation. The U-6 number which is considered to be an authentic reflection of the actual scenario stands at a whopping 16.5% (U.S. Bureau of Labor Statistics, 2010). This is because this figure includes discouraged workers, marginally attached workers as well as part-time workers. Apart from these, there are other sections of the workforce that are not even covered by the U-6 numbers. These include temporary workers, under-paid workers, underground workers and persons involved in criminal activities (Benítez-Silva, 2010).

Discouraged and marginally attached workers

The discouraged workers constitute a major section of the labor force. In the U.S, discouraged workers are those who have stopped looking for work after realizing the futility of their efforts. “They believe there are no jobs available for them. Discouraged workers are those people who are want to work and have looked for suitable jobs during the last 12 months but have not been able to find one” (Helpman, 2010). If the numbers of discouraged workers are incorporated into the “official” unemployment rate, it shots up considerably.

In addition to the discouraged workers, there is another broader category of workforce referred to as the “marginally attached workers” (Sahin, 2010). Helpman (2010) even indicated that “These include those workers who are currently not looking for a job but have been on the lookout for a job in the recent past and would take up a job if offered. Discouraged workers constitute a sub-set of the marginally attached workers” (Helpman, 2010). The reason for omitting the marginally attached workers is that they have not looked for jobs during the last four weeks.

Part-time workers

The U-3 number also excludes those persons who want to work full-time but are forced to work part-time due to “economic reasons” (Sahin, 2010). According to Helpman, (2010) “These are the persons who are forced to work part-time either because their working hours have been shortened or they are unable to find suitable full-time jobs” (Helpman, 2010). These part-time workers as well as the seasonal workers constitute the under-employed labor force of the U.S.

Temporary workers

Another interesting aspect of the “official” unemployment rate released by the U.S government relates to the role of the temporary workers. According to the unemployment index released for the month of May, 2010, the overall payrolls increased primarily due to the increased hiring of the temporary workers. The data reveals that about 411,000 temporary census workers have been hired by the federal government which has contributed to maximum job creation in the month of May (Ehmke, 2010). However, the same is not the case with the private companies who are hesitant in enhancing their workforce. This sector has created only 41,000 jobs in the month of May compared to 218,000 in April (Benítez-Silva, 2010).

Under-paid workers

The record increase in the long-term unemployment rate post recession has given rise to a new working population comprising of persons who are over-qualified but under-paid. These are the persons who have to compromise with their education and experience and take up jobs for their survival.

The U-6 number, which is believed to be the real unemployment number, also fails to take into account the rising number of over-qualified but under-paid workers. The Bureau of Labor Statistics doesn’t have any accurate idea of the number of such persons in the US at present. If the number of these persons is taken into consideration, the unemployment rate is bound to be even higher (Sahin, 2010).

Underground economy

Parallel to the national economy, there exists another prosperous economy in the shadowy world where ‘jobs, services and business transactions are conducted by word of mouth and paid for in cash to avoid scrutiny by government officials” (Sennholz, 2003). This is known as the “underground economy” Sennholz, 2003).

However, the underground economy needs to be distinguished from the criminal activities of the underworld in the sense that they do not inflict any harm on the society. The underground economy consists of persons who indulge in such activities in order to avenge the wrongs done to them by the government.

The kinds of jobs carried out by the underground workers include activities that yield income that are not reported to the tax authorities, economic activities that defy one or several government mandates, productive activities by aliens who do not enjoy the resident status and productive activities carried out by individuals who draw Social Security benefits or other forms of public assistance.

This economy misleads the workings of the government in a number of ways. One of these is in the calculation of the “official” unemployment rate by the government which fails to identify the underground workers. They are either bracketed into the employed or unemployed category depending on the findings of the interview survey that the U.S Department of Labor conducts every month (Sahin, 2010).

Criminal activities

Another major problem with the high unemployment rate in the U.S is the increase in the number of criminal activities. With the weakening of the economy, the less educated and skilled youths face the maximum problem in accessing a decent job. Early denial instigates these youths to indulge in various criminal activities thereby inflicting harm on themselves as well as the society. The BLS, while calculating the unemployment rate of the nation, doesn’t take into consideration the increase in the number of individuals involved in various crimes. Thus, the above discussion reinstates the fact that the ‘official” unemployment rate is subject to modification as there are certain aspects of the unemployment problem that needs consideration (Helpman, 2010).

Impact of the unemployment rate on the economy of United States

The unemployment rate is an indicator of the growth rate of a nation. The high unemployment rate that has struck US after the recession has a number of economic implications.

Firstly, high unemployment means that the economy is unable to boost its situation by making use of the productivity of the unemployed individuals. High unemployment has a direct cost to the government since it is forced to pay unemployment benefits to individuals without any job and thus looses out on tax earnings.

The double costs incurred by the government in the form of additional costs and lost incomes can further aggravate the already declining economic condition. This is because the government will be forced to fund its unemployment benefit plans by increasing taxes and borrowing (Ehmke, 2010).

The increased taxes will again impact the consumption rate of the individuals. This will lead to further unemployment as people will spend less, there will be fewer revenues for the companies and companies will be forced to lay off more people. It must be taken into consideration that consumer spending forms an important part of the U.S economy. It is commonly held that consumer spending “accounts for 70% of the U.S Gross Domestic Product” (Global Research, 2009).

Increased borrowing by the government implies that the government will be forced to take more money out of the financial markets. This will again have an impact on the interest rates which will lead to higher company costs, less profit and more layoffs.

In the case of a sharp rise in the unemployment rates, the banks would be worst hit as they will have billions of dollars of bad loans on the balance sheets. This would, in turn, impact the dollar value. The rate at which banks will suffer loan loss will increase considerably which will make them more tight-fisted while lending loans.

Another impact the rising unemployment rate will have on the U.S economy is regarding the increase in the number of persons who have remained jobless for a longer period of time. After the recent recession that hit the U.S market, the number of such persons has reached a record 5 million. The problem with the increasing population of individuals remaining unemployed for a longer period of time is that it would be difficult for them to be reemployed after such a long gap. This would leave them unemployable for the rest of their lives which would have a strong impact on the economy. The economy would not be able to utilize its labor resources to the maximum (Benítez-Silva, 2010).

The primary goal for any economy is not to attain zero unemployment. This is because a developing economy must have a minimum level of unemployment failing which the employers would not be able to find suitable workers. Lack of suitable workforce would impact the product output.

However, the inherent aim of most economies is attainment of full employment. Full employment is not the same as zero employment. The concept of full employment becomes clear with the help of a basic understanding of the three types of unemployment.

Types of unemployment

The three types of unemployment to be discussed here are ‘frictional unemployment’, ‘structural unemployment’ and ‘cyclical unemployment’ (Sahin, 2010).

Frictional unemployment

Frictional unemployment is defined as the unemployment that occurs when individuals switch different jobs or when they enter the labor market. The period of unemployment results from the fact that finding a suitable job takes some time. However, frictional unemployment is a temporary phase as this is the time taken by the job-seekers to find the suitable jobs. In this context, reference may be drawn to the fresh college graduates who may take a couple of months to find the desired job. It is believed that some level of frictional unemployment always exists in the society (Helpman, 2010).

Structural unemployment

The structural unemployment is considered a more serious form of unemployment. “This is because this kind of unemployment is the direct result of a complete mismatch between the skills required for specific jobs and the skills possessed by the job seekers” (Ehmke, 2010). It can also emanate from a mismatch between the job location offered and that desired by the job seekers.

Structural unemployment is considered to be long-term unemployment as individuals with specific skills require time to find jobs that match their abilities. Moreover, relocation to other places also requires considerable amount of time. Reference may be made to the many garment workers who lost their jobs when the garment factories moved overseas. This gave rise to structural unemployment as these workers did not have the necessary skills to fit into computer related jobs (Sahin, 2010).

Cyclical unemployment

“Cyclical unemployment occurs when there are fewer jobs available in the market due to slower economic growth. Due to less demand of goods and services, the number of available workforce is greater than the number of workforce required” (Ehmke, 2010). Cyclical unemployment occurs during recessions. As has been already mentioned, an understanding of the above unemployment types helps us in our understanding of the concept of full employment. “Full employment occurs when cyclical unemployment is zero and frictional and structural unemployment are at the lowest” (Ehmke, 2010).

When the unemployment rate is higher, the economy cannot utilize the human resources effectively. On the other hand, when the unemployment rate is lower, the number of available workers become less thereby giving rise to inflation. Full employment, thus, refers to the optimum unemployment rate and is defined as “the lowest unemployment rate consistent with stable prices” (Bureau of Labor Statistics 2009).

Role of education in reducing unemployment

Education and proper training plays a pivotal role in reducing unemployment which is a global problem. During economic slowdown arising out of recession, the worst affected are those who have less education and insufficient skills to fit into any job. They lack the necessary job requirements that leave them unemployed for a longer period of time. Out of frustration and anger, they select the easiest route to earn their living by indulging in a number of criminal activities.

Structural unemployment is a common feature not only of an economy hit by recession but also of a stable economy. This is a recurrent feature in today’s world. Rapid technological advancement and global integration leads to the development of new sectors and decline of the older ones. This calls for a highly skilled workforce who possesses the flexibility to adapt to the changing demands for job (Benítez-Silva, 2010).

This becomes difficult for persons who have the necessary skills to work in specific capacities. Naturally, when they are laid off or when their sector suffers a decline, it becomes difficult for them to find new employments. This problem is referred to as occupational immobility of labor (Sahin, 2010).

However, this problem can be addressed by formulating policies aimed at providing the unemployed with the necessary skills to meet the growing job needs. By providing necessary education and quality training, these individuals would be qualified enough to satisfy the job needs. By improving the quality and availability of education and workforce training, more and more unemployed persons will gain the necessary expertise which would facilitate their re-employment in other sectors. Thus, education and effective workforce training will help in reducing the unemployment rate considerably. For this, both the employer and the employee need to understand the benefits of education in addressing the problem of unemployment (Helpman, 2010).

The problems of cyclical unemployment which result from economic slowdown can also be addressed with the help of education and training. This can be well illustrated with the help of the data regarding the unemployment rate as calculated in the year 2009. The data reveals that the unemployment rate has been recorded least among the professional degree holders (2.3%) followed by the doctors (2.5%) (Sahin, 2010). The Master’s degree holders recorded an unemployment rate of 3.9% while the bachelor’s degree holders had an unemployment rate of 5.2% (Benítez-Silva, 2010). Unemployment rate was higher among the high school graduates (9.7%) and maximum among those who had less than a high school diploma (14.6%) (Ehmke, 2010).

Conclusion

The above discussion, thus, draws our attention to the fact that there is a greater discrepancy between the “official” unemployment rates as released by U.S government and the real unemployment numbers. This disparity between the two numbers has also given rise to a lot of confusion regarding the definition of unemployment as followed by the Bureau of Labor Statistics. Moreover, it has also triggered a debate as to which sections of the labor force are to be taken into consideration in order to calculate the unemployment rate. The upward rise in the unemployment rate in the U.S has impacted the economy in a number of ways. Steps should be taken to reduce the unemployment rate as it has got serious implications. Apart from the various economic setbacks, high unemployment rate also increases criminal activities among those who couldn’t find suitable jobs. The goals of unemployment need to be understood before addressing the problem. There are a number of ways in which unemployment can be reduced. One of these is education. Providing quality education and proper workforce training can help in developing the human capital and preparing them for all sorts of jobs.

References

Benítez-Silva, H. (2010). Capacity for work and the business cycle: an international perspective. Economic Policy, 25(63), 483-536.

Bureau of Labor Statistics. (2009). Unemployment. Web.

Disqus. (2010). Unemployment About 14.6 Million in America. Web.

DM. (2010). U-6 Unemployment Rate Was 14.8% in February. Web.

Ehmke, E. (2010). Social security in times of crisis. International Social Security Review, 63(2), 47-70.

Global Research. (2009).The Rising Tide of Unemployment in America: How Bad Will It Get, And What Can We Do? Web.

Helpman, E. (2010). Labour Market Rigidities, Trade and Unemployment. Review of Economic Studies, 77(3), 1100-1137.

Sahin, A. (2010). Labour-Market Matching with Precautionary Savings and Aggregate Fluctuations. Review of Economic Studies, 77(4), 1477-1507.

Sennholz, H. (2003). The Underground Economy. Web.

U.S. Bureau of Labor Statistics. (2010). Table A-15. Alternative measures of labor underutilization. Web.

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