Unemployment trends and economic theories in the United States, 2003-2013

Unemployment Issues in the U.S.

There many factors and issues that relate to the unemployment situation in the United States. This paper delves into the unemployment data over the past ten years, and examines the economic conditions that create large numbers of unemployed persons. The paper also looks at the various approaches to unemployment -- the Keynesian viewpoint and the classical viewpoint vis-a-vis unemployment -- and provides scholarly narratives on the subject.

Unemployment between the years 2003 and 2013

Department of Labor statistics are quite different from the data used by the Gallup organization -- due to the fact that the DOL apparently, in addition to phone interviews, uses data supplied by employers (which makes the percentages of unemployed persons lower) and the federal data is seasonally adjusted. According to the DOL, in December 2002, the unemployment was at 5.6%; in December 2003, the unemployment rate was 5.6% (Bureau of Labor Statistics -- bls.gov).

In December 2004 the unemployment rate was 4.9% and in December 2005 the unemployment held steady at 4.9%. The unemployment rate dropped a bit 2006; in December (2006) it was at 4.7%, and in December 2007 it dropped to 4.5%.

In 2008, as the recession began to take its toll on employment (people laid off from companies that were impacted by the economic downslide) the unemployment rate rose to 6.7% of the workforce. In 2009 it rose still higher to 8.7%; in December 2010 there were 274,712 people seeking work (7.9% of the workforce) (bls.gov).

In December 2011, the unemployment figures dropped back down to 6.9%; and last year, in December 2012, the unemployment rate was 6.7%, according to the bls.gov.

That having been said, Gallup research shows that in November of 2012 the unemployment rate ("without seasonal adjustment") was 7.8%, up from 7.0% in October (Gallup). When "seasonally adjusted" the unemployment rate was 8.3% in November, 2012 (Malar, 2012).

How does Gallup come up with unemployment numbers? They conduct "daily tracking interviews" with approximately 30,000 Americans (using land lines and cell phones), which is quite different than the U.S. Department of Labor.

Gallup puts the unemployment rate (as of November 2012) for college graduates at 4%; the unemployment rate for Americans between the ages of 50 and 65 was at 5.5%; for Caucasians the unemployment rate was 6.5%; for African-Americans it was 12.4%; and for Latinos it was 10.6% (Marlar).

A media release by the Bureau of Labor Statistics on February 1, 2013, reports that 157,000 people (non-farm-related) were added to the employment rolls in January, which left the unemployment rate at 7.9% (www.bls.com).

What's the difference between Keynesian and Classical economic theories?

Classical Theorists tend to believe that government intervention should be avoided if possible. Right away that makes the classical theory different from the Keynesian theory. Osmond Vitez, writing in the Houston Chronicle, explains that classical theorists believe in a "laissez-faire economic market" -- other words individuals in the economic milieu are free to act in "their own self-interest" when it comes to economic decisions (Vitez, 2013).

Glancing briefly at Blinder's descriptions of Keynesian theory as explained earlier in this paper, one can see that the Keynesians believe government should intervene at certain points in the economic life of the nation. But in the classical genre, resources are allocated "according to the desires of individuals and businesses in the marketplace," Vitez explains. Classical economics uses the "value theory to determine" what prices should be in place in the market. Prices in the classical view should depend on production output, the technology used to produce products, and the money paid to those who produce the products (wages) (Vitez).

While government spending is a big part of the Keynesian approach, government spending is not "a major force" in classical economic theory, Vitez continues. What is important to classical theorists -- in terms of economic growth -- is "consumer spending and business investment"; in fact classical economists believe that government spending and government meddling in the money system "can retard a nation's economic growth" (Vitez).

Why does government spending and government intervention in the economy have the potential to harm the economy? Classical economists believe government spending tends to increase the "public sector" and diminish the "private sector" (Vitez). And so one huge difference between the two approaches is that Keynesian economics (which got its start during the Great Depression, when government action was important to jumpstart a failed economy) relies on the government increasing spending to revive a sluggish economy while classical economic theory holds that the economy will right itself if economic resources are allocated properly in the private sector (Vitez).

If there is high unemployment, the classical approach is not to pump government money into the economy; that is the Keynesian approach. According to TR Jain, writing in Macroeconomics and Elementary Statistics, if production in the country slows down, and unemployment is a result of that slow-down, "…money wage-rate will be cut" (Jain, 2003). And with that cut, the demand for labor "…will rise and become equal to its supply. In this way unemployment will disappear and the condition of full employment will be re-established" (Jain, p. 4). The belief in a classical approach means accepting the fact, according to Jain, that "unemployment is a temporary phenomenon in a capitalist economy" because the natural forces of the market will "…succeed in removing it automatically" (Jain). Government intervention will not be needed under the classical approach to unemployment, Jain concludes.

The International Monetary Fund

Writing in the International Monetary Fund journalist Ceyda Oner explains that it is not surprising that during the recent global economic downturn unemployment around the world reached "…the highest level on record" (Oner, 2012). About 7% of the world's total workforce was outside looking in when it came to employment.

Oner presents a very simplified review of economic dynamics: when economic activity is strong, it naturally calls for an increase in production -- and more people are thus in demand to produce the goods that consumers are demanding. Hence, unemployment is reduced. But when economic activity is low, as it was during the recent recession in the United States, the companies reduce their workforces, laying people off, and unemployment goes up (Oner).

That having been said, "unemployment does not fall in lockstep with an increase in growth," Oner continues. Typically, a company will attempt to recover from an economic slump by "…having the same number of employees do more work or turn out more products," which is basically increasing productivity during a downturn. More workers will be added (and unemployment will be reduced) as the slump ends and consumers start spending money again.

In conclusion, it is interesting to note that according to "Okun's Law" a 1% decline in unemployment "…corresponds to a 3% rise in output" (Oner). So it behooves the private sector and the public sector to do everything possible to reduce unemployment so the economy can get back on track at the same time workers are getting back on the job.