Unemployment measurement discrepancies and their economic impact

Decreasing United States Unemployement

Unemployment

How to Decrease Unemployment in the United States

Unemployment in the United States has reached an extended peak that it has not seen since the end of the 1930's. People are worried that this could be the new norm, even though the rate seems to be trending down again. Unfortunately, too many people also realize that much of the downward trend comes from the federal government constantly readjusting how they gather the numbers. By taking people off of the rolls of those looking for work they are able to say that the unemployment number has decreased without actually doing anything. The fact is that while the rate seemed to be staying in the high, in the 10% range, it was actually much higher than the government was reporting. Robins (2010) reports that

"These figures contain the amount of people currently receiving benefits only. This does not include people whose benefits have run out or people who did not qualify to receive unemployment. These figures do not include part time jobs that have been lost or seasonal jobs such as holiday or summer employment."

It is not necessarily that the government is being deliberately deceptive because this is the way that the data has been collected since Ronald Reagan (who added the military to the group of employed to pad his numbers, a factor that was quickly changed (McClain, 2006)). But, it is necessary to see that the issue is much larger than the government has been reporting.

The government actually has a good reason for reporting the numbers this way. They realize that even employed people are affected by the unemployment numbers psychologically. When someone hears that the number is high and going higher, they may not spend money, thus improving the economy, because they are worried that they may soon not have a job. Thus, the government skews the numbers slightly positive to change this perception of the economy. This paper will examine the impact that unemployment has on the nation, what policy change can be made to truly lower the numbers (and the theory behind that change), and then determine whether the change would have an actual positive impact on the unemployment numbers.

Major Impact

It is first necessary to look at what unemployment entails to determine what impact it has on the economy and on individuals within that economy. According to the International Labor Organization (ILO) an unemployed person is defined as someone who is "aged 16 and over…out of work, want a job, have actively sought work in the last four weeks and are available to start work in the next two weeks; or are out of work, have found a job and are waiting to start it in the next two weeks" (Sinh, 2012). This definition is somewhat better defined by the United States. The Bureau of Labor Statistics (2011) says that

"Labor force measures are based on the civilian non- institutional population 16 years old and over. Excluded are persons under 16 years of age, all persons confined to institutions such as nursing homes and prisons, and persons on active duty in the Armed Forces. As mentioned previously, the labor force is made up of the employed and the unemployed."

Thus, the government includes all people who are thought capable of holding a job who are not confined to and institution and are 16 years old or more. It is interesting to note that being in high school does not exclude someone from being counted as unemployed. However, based on the manner in which the government collects the data, teens may be seen as not in the labor force if they are not actively looking for work or they are not considered family workers (BLS, 2011).

From the above analysis of the different definitions of employment, and the determination of who is considered employed and who is not, it simple to determine that there will never be a time when the population will be completely employed. It is impossible to reach 0% unemployment because there will always be someone who is transitioning from one job to another, going to high school or college and not currently looking for work, and those who are capable but just do not have the need to be employed for some reason (McBride, 1999). But this poses a problem; namely, what is considered an acceptable amount of unemployment?

Economists have been puzzling that question out for decades. The answer from the Keynesian side is generally that there is not acceptable rate of unemployment. Through government control of the economic process it is possible to achieve an actual 0% level of unemployment (McBride, 1999). However, this does not seem to be possible, even to modern Keynesians who follow the Phillips curve. This is a determination of how much the economy can be expanded so that inflation and unemployment meet (Kangas, 2005). The Phillips curve was constructed from the knowledge that when unemployment was high wages lowered, and that when unemployment was low wages went higher. This formed an easy to follow curve that seemed to show the level of unemployment should be around 4% to be considered full employment (Kangas, 2005). Economists of the classical stripe do not believe in the Phillips curve because it will only work in a perfect world in which people and the government follow the same lines of logic and increase or decrease prices at the same time and at the same rate. But classical economists do believe that there is a natural rate of unemployment that exists because people will always be in some amount of flux.

The current unemployment rate is tied to the fact that the economy greatly faltered in 2008, even though it could be said to have its beginnings with decisions made as far back as the 1960's, and that many people lost their jobs due to a snowballing effect. This meant that people who may have had the same job for decades lost it, in some cases because of the economic downturn. This caused a significant rise in unemployment, and that eventually became chronic for many. People who had advanced degrees were actually forced to look for work at low paying jobs or they had to take whatever temporary job was offered to them. This part of the current crisis is the most unusual aspect because most of the time unemployment does not affect people with education like this one has. However, since many major industries have been affected by the downturn, they have had to lay off workers who would normally be able to ride out a crisis such as this one.

The primary impact is to money. People without a job do not have any way to generate it because of their lack of a job, so they are forced to make some hard choices in the face of disaster. A person can take one of four possible avenues to survive when they are chronically unemployed. They can use savings, seek any type of work that presents itself, move in with family, or they can become homeless and live in shelters.

Seeking employment has become difficult because people are looking for work in a position that was similar to the one that they lost. Most of the time this is not possible, so these individuals become classified as under-employed. This is a term that finds its origins in the cases of people who do not look for work in a high paying sector, but are content with a lower paying job despite having the education of experience to do more. In the current case, it is not a choice, but a necessity for many people. There is also an issue for these folks when it comes to finding a job. They will often have a difficult time finding even temporary work because companies realize that they will likely look for something else if they can find it. Thus, the potential employer will reject them as potential employees because of the likelihood that they will not be around for very long.

Of course, many people will work anywhere that they can just to make enough for their family to survive on. It does not matter to this person what type of job it is, they realize that when the economy gets better that they will be able to get back to the level they had previously attained. The problem with this logic is that it causes difficulties in other sectors of the population. Many of the jobs that adults have to take now are traditionally thought of as starter jobs that a teenager would take. Because they are already occupied by more experienced workers though, many teens are now without jobs. The teen unemployment rate has been more than double that of adults for more than four years now (Adams, 2011). This could be more of an issue because according to Adams (2011) "teens who have a spell of unemployment now run a greater risk of being unemployed in the future, a greater risk of earning lower wages down the line, and of dropping out of high school." This means that the economic impact to many families could go on for decades due to the fact that these teens are unable to find jobs. The problem is even more pronounced for minority teenagers. African-Americans between the ages of 16 and 19 years have a current unemployment rate (as of January of this year) of 38.5% (BLS, 2012). that is nearly double the current rate for white teens which is 21.1%. For black teens this rate is down from a high of 46.9% (BLS, 2012). The teen unemployment rate is traditionally higher than that for adults because it is more difficult for them to find gainful employment without the benefits of experience, but it is has been at a record high point, and much of this can be attributed to the fact that adults are taking the jobs that, in a normal economy, would be reserved for them.

Many people are trying to defray the costs of lower income by moving back in with family. Of course, the major issues here are that this can cause a great deal of tension between family members, and this could also result in the family having to move to an area where the job situation is even worse. This then can cause chronic underemployment, and continued reliance on family for many years.

Another alternative is for the family to either live off of welfare, or to become homeless and live in temporary shelters until they can find some type of meaningful employment. This has become less of a story in the past few years because families are able to find employment more readily, but it has been a fact for some people. The dependence on welfare can also become a chronic issue in a family if it continues for too long.

The last impact could be the most damaging for the long-term. People are having to use savings that they had planned to save until they had retired. This means that they will either have to make this money up when they get a job again, or the money will just be lost, and they will have to downsize their retirement plans. Also, this could significantly impact people's social security when these people reach retirement age. The reliance on Social Security could mean that people have to severely curtail the manner in which they live, and it could also mean less money being pumped into the economy than could have previously.

Economic Theory Backing

Many theories back up this method of improving the outlook of the economy and thus decreasing the rate of unemployment. As a matter of fact, this is illustrated in the two major theories of economics: Classical and Keynesian. Both of theories agree that if people are more confident in the economy then they will increase their output and that will reduce unemployment. However, Keynesians would want the government to be the primary job provider with public works projects and other such types of employment that the government can control. However, classical methods suggest that citizens should be the primary impetus of any recovery. Private employers are going to be the ones who do the most good in helping the economy to recover, and that is the segment of the population that needs to be influenced. If the government takes some proactive steps, such as reducing taxes on small businesses (as well as large), they will see that immediate increase in revenue and feel that they can take the risk inherent in hiring more employees. This would also have the benefit of reducing the unemployment rolls. People would be put back to work by the small businesses which would affect their buying power, and induce large corporations to begin hiring again to produce the new goods that are needed.

How Recommendation Would Solve the Problem

Some of that explanation is above, but increasing the helps that small businesses receive could also drive the country into the next century. New types of business are opening all of the time, but they have difficulty because they often have to create a market, or at least a larger one. These new businesses, based on green initiatives and other new ideas, should be encouraged, not with handouts, but with education and breaks on their taxes. A business environment needs to be created that will encourage citizens to once again become involved in the idea that any idea can become a successful and profitable business. The government, with the help of private citizens can accomplish this.