Introduction to Economics Part 6 - Unemployment

Someone who is unemployed is:

1. Currently not working
2. Willing and able to work
3. Actively searching for work

The unemployment rate is the ratio of workers unemployed compared to the number of workers both employed and unemployed.

Unemployment Rate = Unemployed Workers / Total Labor Force

There are two types of unemployment:

Voluntary Unemployment
Involuntary Unemployment

Voluntary unemployment refers to people who are unemployed by choice.  Why would anyone want to be unemployed?  A few reasons.  Perhaps they have quit their job because they wished to pursue another.  This is a rational voluntary choice.  Contractors who are between jobs are also considered voluntarily unemployed due to the nature of their job.  After his contracts expire, the contractor may be out of work, but he is considered voluntarily unemployed because he has made the rational choice to live the life of a contractor, which has its own advantages and disadvantages compared to a steady career.

The third factor that commonly causes voluntary unemployment is changing industries.  One example of this was when automobiles first began to replace horse-drawn carriages.  People who built buggy whips found their industry much less lucrative than it used to be, so many buggy whip manufacturers chose to close their shops and find other jobs.  While they were certainly under economic pressure to make this choice, it was still a voluntary choice, and thus considered voluntary unemployment.

Voluntary unemployment is overall a good thing for the economy.  It encourages new ideas, expires obsolete ideas, and keeps up competition.  The "bad" kind of unemployment is involuntary unemployment.

Involuntary unemployment is what most people are talking about when they mention unemployment.  It represents the total number of people who are willing and able to work and are looking for work, but are unemployed for reasons other than their own choices.  Involuntary unemployment can be divided into two types:

Perpetual Unemployment
Cyclical Unemployment

Perpetual unemployment pretty much stays the same over years, with very slow, gradual changes.  Cyclical unemployment happens in cycles - it goes up and down regularly and (usually) predictably.

Perpetual unemployment is our primary concern.  The greatest cause of unemployment in the United States is the minimum wage, for reasons discussed in the previous lesson.  Minimum wages set above the equilibrium point cause perpetual unemployment, but could there be other culprits as well?  The influence of unions and choices made by influential businesses can also cause wages to be set above the equilibrium point, however these two are relatively uncommon causes of unemployment.  The wage demands of unions are usually just trying to keep up with inflation, and employers tend not to suffer the problem of paying their employees "too much."  Additional government intervention besides the minimum wage tends to be the culprit.  Legal requirements for various kinds of insurance and benefits add to the expenses firms must pay to hire new employees.  Government licensing laws and paperwork requirements act as barriers to entry.  An employer may have to pay several times your monthly salary just to file the paperwork associated with hiring you.  This disincentivises new employment, particularly of unskilled laborers, and encourages protectionism within firms.

MYTHS ABOUT UNEMPLOYMENT


Every once in a while we get this sort of neo-luddite movement.  People fear that new technology, specifically, labor-saving devices, result in unemployment.  This is simply not the case, and five seconds of logical thought can recognize why.  If technology resulted in unemployment, then we would have lower employment today than any other time in history, due to our advanced technology.  Furthermore, new technological developments would never result in new jobs.  Neither of these are the case.

When someone had a job screwing a bolt into a door, and is replaced by a drill, that laborer is now a free resource that can be working elsewhere more productively.  Rather than screwing in the bolt, the employee can work in door construction, build engines, or provide some other service that was not efficiently provided before.  He may change fields - work in airplane construction or boat manufacturing, or even become a supervisor for his business.  Far from resulting in fewer jobs - technology results in more production, more wealth, and better employment.

While it is true we could achieve 100% employment by eliminating technology, this would not be a healthy economy.  We could eliminate planes, trucks, and trains, and carry all materials on our backs across the country, thus employing every man, woman, and child in America.  Would this really benefit our society?  Of course not.  A healthy economy is not an economy in which every single person is employed.  A healthy economy is one which operates at maximum efficiency, and that means it is flexible and allowed to reach equilibrium.  It is when equilibrium is not allowed to be reached that poverty and exploitation occur.

Another common myth about unemployment is that it is caused by immigration.  Let's say you have an immigrant move in who does your job for minimum wage while you're being paid $3 more than minimum wage.  People claim that these immigrants "crowd out" employment for everyone else.  They don't, and the people who think this is true are running into yet another fallacy associated with THE LESSON.  They are looking only at the first order reaction of the new immigrants - the unemployed or lower-salaried worker.  However we must remember that these immigrants are not just workers - they are consumers as well.  When they are paid, they will buy food, clothing, housing, electricity, water, toys for their children, and all sorts of other resources.  If the immigrant brings in a whole family, all the better!  He will have only taken one job, but a whole family of consumers will be purchasing on the market.  The immigrant will have to work very hard to provide for his family, and his work will increase the wealth of the entire community.  Immigration is never a bad thing for the economy for the same reasons a massive influx of food or energy are never bad things for the economy.  More production results in greater wealth for everyone.

If you lose your job to someone willing to be paid less than you, and his wage does not change within a few months of employment, all this means is that the true wage value of your job is less than what you were being paid.  You were one of the lucky ones able to demand a higher pay than your work was worth on the market.  You probably held a monopoly on your skills until the arrival of the immigrant, and you could not compete.  You will either have to accept a lower wage, like any business, or improve your skills to become more valuable to the market. 

If the immigrant is working for below minimum wage, then that's a sign that the minimum wage is higher than the equilibrium wage.  The free market is attempting to reach equilibrium through immigration.  If it can't do it in the white market, it will have to do it in the gray market.  Any forced manipulation of the market by governments, corporations, unions, or individuals will injure everyone, including the manipulators, and it should best never be done.

Thanks for reading!