One of the greatest factors in our economy today is unemployment. Unemployment is the labor force participants that have inability to find jobs. There are certain exceptions to being unemployed such as woman who devotes her time to being a housewife or a person who is doing charity work and donating their time. An important rule of thumb before discussing how unemployment affects our economy is to remember that, to get the maximum out of the available production capacity we need to reach full employment.
Before I get started on discussing how unemployment effects our economy I would like to show some interesting statistics. According to the Government 6.5 million people are unemployed, 5.5% of people are unemployed, and 12% of people are below the poverty line. But according to the infamous Michael Moore up to 13 million people are unemployed, up to 11% of people are unemployed and 20 % of people are below the poverty line. As you can see, the United States Government has totally different numbers than Michael Moore. This is because the government can not account for everyone in their country. People without homes can not be counted as homeless because there is no way to contact all of them, or not count them twice.
The types of unemployment are cyclical that is related to the business cycle, falling GDP growth, and workers who are laid off due to falling demand for labor. Iit is caused also by declining aggregate demand. Then there is structural that is a mismatch of labor skills with the offered job vacancies. It is cause by economic reforms and new technologies such as the car industry and by workplace downsizing and tariff or quota cuts. Frictional is another type of unemployment and is from people moving jobs or looking for their first job or rejoining the work force, this is just normal labor market turnover. Seasonal unemployment is self explanatory; examples would be Christmas jobs or fruit pickers.
Arthur Okun measured the relationship of the production possibilities curve and unemployment. Okun’s law can be stated as saying that for every one percentage point by which the actual unemployment rate exceeds the «natural» rate of unemployment, there is a 2 to 4 % «GDP Gap». That is, unemployment above the inflation-threshold unemployment rate corresponds to real gross domestic product below potential output.
When a country is facing unemployment problems there are certain opportunity costs for it’s citizens, which means the economy is not running on full production frontier. These opportunity costs are lower living standards, consume resources, no production contribution. A decline in labor market skills for the long term unemployed and finally lower wage growth.
One of the reasons so many people are unemployed is DOWNSIZING. Downsizing is laying off a lot of people all at the same time. It is mostly done to increase company profits. For example AT&T laid off 40,000 people and made $16 million and IBM laid off 60,000 people and made $2.6 million. During the late 1990′s, many large companies started downsizing, but then the news caught hold of it and it made headlines all around the United States. The cover of Newsweek had mug shots of CEO’s with the title «Corporate Criminals».
Many large companies soon realized that they had to lay off people in smaller amounts. But I have a list of many of the companies that laid off people under the radar: NEC, Oshkosh, AOL, Westinghouse, Honeywell, RJR Nabisco, Hewlett-Packard, US West, Wells Fargo, Kmart, Office Depot, Honeywell, Whirlpool, Lockheed Martin, First Boston, TRW, Goodyear, Samsonite, Sunbeam, Raytheon, McDonnell Douglas, WM. Wrigley Jr. Co., and many many more.
I would like to now go into more effects of Unemployment economically and socially. First off higher unemployment causes lower real GDP, reduced national income and lower living standards. Economic and social hardships are suffered by families of the unemployed. There is also a social stigma attached to unemployment. The longer a person is unemployed the harder will be for them to ever set foot in the productive world again.
The increase in the taxation burden as taxpayers must fund the social security payments. It can also lead to a less equal distribution of income. Other social costs include the rising crime rates, family breakdowns, loss of dignity, drug use and alcoholism.