Normal Circumstances, it Can Be

¶ … normal circumstances, it can be stated that the greater the number of goods and services being produced, the greater the demand for the labor necessary to produce those goods and services (Davidson, 1983). Conversely, when the demand for goods and services is decreased so is the demand for labor. Obviously, based on these scenarios, unemployment rates and the condition of the economy are closely related.

Unemployment rates measure the level of joblessness in an economy (Oyner, 2010). Unfortunately, unemployment rates do not represent the total level of unemployment, but rather, they measure only the number of individuals looking for work within a specified time frame but they do not include those who have stopped looking for work or are underemployed. Nevertheless, although not a perfect barometer, unemployment rates still provide valuable insight into how well the economy is doing.

Unemployment rates, by themselves, are not an accurate indicator of economic health. Unemployment rates lag behind other economic indicators and, as a result, they tend to rise after other indicators indicate that the economy is in a recession and fall well after a recovery has begun (Baumohl, 2004). Therefore, unemployment rates are best used as a confirming source in conjunction with other economic indicators such as housing starts, inventories, and durable goods shipments.

Unemployment rates are a great measuring device but what of the practical side of unemployment? Persistent high unemployment is a drag on the economy and it is a discouraging reality to those experiencing it. Payroll and income taxes are the primary source of income for the federal and state governments. These taxes, paid by ordinary citizens, are how our federal and state governments operate their programs. Yet, unemployment is too often afforded little consideration by politicians and the national government in periods of recession. In light of the symbiotic relationship between revenue and employment this policy is difficult to understand.

Unemployment causes a severe waste of scarce economic resources and reduces the long-term growth potential for an economy. Having large numbers of unemployed individuals standing idly lowers the possible production levels of any given economic state and the period when there are large numbers of unemployed represent loss production possibilities that can never be recovered. The practical effect of unemployment is that the government is forced to spend more dollars on increased levels of benefit payments such as unemployment and food stamps while at the same time receiving fewer dollars in revenue in tax income. The unemployed are spending less while contributing less to the government. The result is that the government is forced to borrow at higher amounts in order to finance its operations.

High unemployment also creates a certain sector of workers that are virtually excluded from the economy due to their lack of proper education and training. Today's economy changes so rapidly that the unemployed find themselves being excluded as education and training levels increase. The unemployed find that their skills levels have not maintained pace with the economy and, therefore, their chances of gaining employment are decreased. This decreased chance at employment increases again the pressure on the government to sustain and attempt to retrain these individuals.

With high unemployment there is a corresponding increase in social costs that must be absorbed by society in general and the government specifically (Linn, 1985). These rising social costs include an increase in crime rates, increases in divorce rates, and worsening health and lower life expectancy. High unemployment is also reflected in a decline in real income and spending by those who are unemployed. Those facing long-term unemployment are forced to live on the fringes of society and, because they are often members of a younger generation, they are more likely to be less strongly tied to their community. This causes them to be more mobile and more likely to leave the communities where they were raised; communities that are often burdened with high employment. These communities face an aging workforce that makes them less attractive as a potential location for new businesses that might re-energize the community.

Economists have struggled for many years to develop a formula that accurately measures the direct effect of unemployment on the overall economy. To date, no formula has been devised that is universally accepted by the economic community as a valid and reliable indicator. Part of the problem in formulating an accurate equation that accurately reflects unemployment's effect on the economy is that unemployment comes in three different forms and each has a different effect (Cashell, 2004).

The first form of unemployment is described as frictional unemployment (Thirlwall, 2007). Frictional unemployment has the least effect on the economy due to its temporary nature. Persons in this type of unemployment are considered between jobs and are merely investigating better options or waiting to begin a new one. They are generally highly employable individuals and because the duration of their employment is minimal they have little or no impact on the economy.

The second type of unemployment is caused by a mismatch in skills between the available workers and the jobs that are being offered in a certain geographical area. This type of unemployment, known as structural unemployment, is more serious than frictional unemployment and has a greater impact on the economy. The workers affected by this type of unemployment impact the economy because they face possible prolonged unemployment. Too often they must either develop new skills, relocate to a geographical area where their skills are in greater demand, or face a period of retraining. Each of these occurrences involves the passage of time and the unemployment period may be prolonged. A prolonged period of unemployment causes a greater strain on the government services and generates fewer tax revenues.

The final form of unemployment is the most common and the one that is most recognizable by society. This is the form of unemployment that is caused by recessionary conditions. It affects the marginal sector of society that is engaged in lower paying positions and those most reliant upon government services. This type of unemployment is known as cyclical unemployment because it is most sensitive to changes in the economy.

Economists have been able to define unemployment. They have been able to categorize it and they have been able to discuss how unemployment affects the economy. But, like their estimates on the economy in general, economists have failed to accurately predict or explain what causes unemployment or how to avoid its happening.

The causes of unemployment are several but economists talk about four basic causes. No one cause works alone and it is the combination of these causes that leads to unemployment. Surprisingly, one of the causes of unemployment is the establishment of the minimum wage. If the government did not set a minimum wage for all workers the market would eventually lower the wages of all workers until such time as everyone was employed, however, the bottom layer of workers would be working for virtually nothing. In order to avoid this and to maintain a certain standard of living for all workers the government has established a minimum wage. This process raises the income level of the workers but it also causes employers to limit their hiring and causes some resulting unemployment.