VIII Международная студенческая научная конференция Студенческий научный форум - 2016

The unemployment problem, together with inflation, is one of the «greatest evil» of macroeconomics and, therefore, one of the main aspects of any macroeconomic policy.

The existence of unemployment means that the certain group of population definitely doesn’t work. In general, this means that this group couldn’t afford to buy all goods and services, which employed group could. And if unemployment grows larger and larger it is also followed by inequality increasing. Although the phenomenon of inequality is dictated by the market and considered to be natural in any market economy, there exist well-known fact that income inequality couldn’t be infinitely large, because in this case we deal with serious political and social problems of rather higher significance.

One notion in this case is that in some developed countries the gap between richest and poorest is relatively small. But unemployment rate is relatively high.[See application 1 and application 2; Ireland, Spain] Judging by this result, we could say that the problem is much more complicated

All in all, unemployment hurts the market itself in form of decreased output , labor productivity and GDP. That’s why the unemployment problem and unemployment policies have been still analyzed by economists.

There is no doubt that till nowadays there exist theoretical debates, concerning the reasons and consequences of unemployment.

Classical economics, New classical economics, and the Austrian School of economics argue that market mechanisms are able to solve the problem of unemployment by themselves (Close to “Invisible hand of the market”), these theories naturally argue against interventions imposed on the labor market from the outside, such as establishment of labor unions, bureaucratic work rules, minimum wage laws, taxes, and other regulations.

On contrary, Keynesian economics emphasizes the cyclical nature of unemployment and recommends government interventions in the economy, that it claims will reduce unemployment during recessions. These interventions are designed to increase demand for workers (like financial support, programs of job creation, and monetary policies).

In this work the object of research is analyzed through:

• Labor institutions features,

• Business cycle fluctuations,

• Governmental policy;

• Analyzing the historical and current data on unemployment

Review of unemployment problem

Theoretical aspects

It is easier to define the employment: the main condition is that if you have a job you are employed (either full time or part time). To define the unemployment we should introduce some internal definitions.

The US Census Bureau, the federal agency, aimed on collecting data on unemployment, considers the unemployed person, as a person “jobless, looking for job and available for work” (as an example retired workers , which receive social benefits payment and disabled workers doesn’t count). [4] [See application 6 ]

Unemployment could be defined as total number of people who are actively looking for a job but aren’t currently employed.

Labor force could be defined as a total number of employed and unemployed. Judging by these definitions we could derive the following formula:

Also there exist an indicator, showing the number of people, who are currently able to work ( really working or seeking to find it)

To calculate numbers of labor force and unemployed the US Census Bureau hold the monthly survey called the Current Population Survey, which involves interviewing huge number of families. The questions of this survey are obvious, however, it helps to make a statistics and rates themselves, verifying the number of employed and unemployed.

Also in the USA there exist a Bureau of labor statistics, which has quite the same purposes and serves as one of the most reliable sources, concerning US labor statistics. Due to the latest report, “Total nonfarm payroll employment increased by 142,000 in September, and the

unemployment rate was unchanged at 5.1 percent, the U.S. Bureau of Labor Statistics reported today. Job gains occurred in health care and information, while mining employment fell” [3.1]

It should be mentioned here that the real situation of unemployment could be underestimated, provided by official unemployment rate, which is calculated by the formula, mentioned above [1,202] . This happens, because some groups of workers aren’t evaluated as unemployed, although they are able to.

1. Discouraged workers

Non-working people who are capable of working but have given up looking for a job, given the market circumstances

1. Marginally attached workers

People who would like to be employed and have looked for a job in recent past but aren’t currently looking for it.

1. Underemployed

Workers, who cannot afford to work full-time

As an example, we could mention that in 2014 the official unemployment rate was 5,7%, but summed up with these three groups it was 11,3% [3.2]

Last aspect to be mentioned there is that there exist different kinds of unemployment. Given the conflicting political and sociological ideologies in American society, most agree that there are three main categories of unemployment that are readily recognizable.[5]

Those are frictional unemployment, structural unemployment and cyclical unemployment.

1. Frictional Unemployment

Frictional unemployment is always present in the economy. It comes from temporary transitions that workers make when moving from job to job looking for better salary or a job that more precisely matches their skills, or because of a change in locale or family situation.

1. Structural Unemployment

Structural unemployment is created when there is a mismatch in the demographic or industrial composition of a local economy. For example, structural unemployment can be high in a place where there are technically advanced jobs available but the workers in that area lack the skills to perform them, or conversely, in a locale where there are workers available but no jobs for them to fill.

1. Cyclical Unemployment

Cyclical unemployment occurs when there is not enough demand for goods and services in the economy at large to provide jobs for everyone who wants one. According to Keynesian economics, it is a natural result of the boom and bust business cycles. When businesses contract during a recessionary cycle, workers are let go and unemployment rises.

The cycle continues to spiral downward unless and until the situation is improved by outside forces, particularly government intervention of some kind.

Note: To simplify the analysis we won’t count seasonal and voluntary unemployment despite the fact of its existence

Historical aspects of the USA unemployment

The U.S. government began tracking unemployment officially in the 1950s, but estimates of previous unemployment rates are not difficult to ascertain. The Great Depression of the early 1930s had an unemployment rate of 23.6 percent – the highest in modern times. The country’s lowest rate – 1.2 percent – came in 1944 when millions of men were in uniform and the wartime (World War II) economy was in overdrive. The lowest post-war rate was 2.9 percent in 1953. To proper define the historical role of unemployment problem solution during different periods of time let’s take the most important evidences or resonance cases

Great depression

In the USA unemployment was very high during the 1930s. From mid-September prices fell. On 24 October 1929, known as Black Thursday, panic selling began on Wall Street and prices fell catastrophically, an event known as the Wall Street Crash. Business confidence disappeared, banks failed and industry slumped. By 1932 industrial production in the USA had fallen by half and exports fell to one third of their 1929 level. Unemployment went through the roof. By 1932 about one quarter of the work force was unemployed. There had been economic slumps in America before but his one was more severe than anything previously experienced. It was known as the Depression.

It should be mentioned that before the 1930-th economists tended to regard the economy as self-regulating and believed that government attempts to improve the economy would be ineffective [1, 156]. Thus, President Hoover made an attempts to recover the economy without direct government intervention. He persuaded employers to maintain wages at their present levels. He also increased spending on roads, bridges and public buildings. However, Hoover refused to introduce decisive measures and soon became unpopular. In 1932 Franklin Delano Roosevelt was elected President. [6]

There were made huge efforts to stabilize the economy. These efforts were mainly connected with the Roosevelt himself and John Keynes.

Keynes transformed the government macroeconomic approach, by introducing the idea of government intervention into economy, using mainly monetary and fiscal policies, which are widely used by governments even today (Shown in further analysis) . Roosevelt realized his ideas in practice:

• On 12 May 1933 the Federal Emergency Relief Act was passed to help the unemployed. The states were given grants to provide work like repairing roads and improving parks and schools

• In 1935 the Social Security Act created old age pensions and an unemployment insurance scheme.

• In 1938 a Fair Labor Standards Act created a minimum wage.

Despite all of Roosevelt's efforts the depression totally ended with the coming of war. However, there is no doubt, that this historical experience was of the greatest significance. The general sustained approach of macroeconomics has finally changed. That’s why it became possible to develop the ideas of intervention and to make the further recessions

much “milder” then previous ones’

World War 2 and after-war period

The USA mobilized all its resources for war. Industrial output doubled during World War II and by 1943 there was nearly full employment. When millions of men were in uniform economy was in overdrive. In order not to plunge deep into “historical wilds”, it should be just mentioned that this experience showed the USA that the best stimuli of pushing the population into labor force is the case when they are made of under the conditions of big threat. Let’s move to after-war period

As in Britain unemployment was low in the USA in the 1950s and 1960s but it rose sharply in the 1970s. In 1980 the USA was in the grip of a recession. Unemployment was almost 11% in 1982. The United States entered recession in January. The downturn ended in November 1982.The economy entered a strong recovery and experienced a lengthy expansion up to 1990. The recession marked a shift in policy from more traditional Keynesian economics to the adoption of neoliberal economic policies. This change was primarily achieved through tax reform and stronger monetary policy on the part of the Federal Reserve, with the strong recovery and long, stable period of growth that followed increasing the popularity of both concepts in political and academic circles. (See: Application 3)

Great recession

Following the bursting of the housing bubble in mid-2007, the United States entered a severe recession. The United States entered 2008 during a housing market correction and a subprime mortgage crisis.

On September 5, 2008, the United States Department of Labor issued a report that its unemployment rate rose to 6.1%, the highest in five years. The Securities Exchange Act (1934) and The Chandler Act (1938), tightly regulated the financial markets and provided stability up to 1980, when the Reagan Administration began a thirty-year period of financial deregulation. The financial sector sharply expanded, in part because investment banks were going public, bringing them vast sums of stockholder capital. Deregulation also accelerated financial fraud and led to financial bubble creation. Due to the measures, overtaken by government and businesses the recession was finally overcome by 2011. The difference between the newest and oldest crisis could be evidently seen (See: Application 4)

Current situation on US market

National unemployment rate

Table 1

[ 7 ]

As it could be seen from the table, the unemployment rate seems to be unchanged from August 2015 to September 2015. From the point of view of labor statistics, this evidence is acceptable for growing economy of US.

As BLS reports, “In September, the unemployment rate held at 5.1 percent, and the number of unemployed persons (7.9 million) changed little. Over the year, the unemployment rate and the number of unemployed persons were down by 0.8 percentage point and 1.3 million, respectively” [3.1]

Among the major worker groups, the unemployment rates for adult men (4.7 percent), adult women (4.6 percent), teenagers (16.3 percent), whites (4.4 percent), blacks (9.2 percent), Asians (3.6 percent), and Hispanics (6.4 percent) showed little or no change in September 2015.

Alternative measures of labor underutilization

The Bureau of Labor Statistics (BLS) has for many years published various ways of measurement of unemployment and other labor market difficulties. There are six “alternative measures of labor underutilization” published each month in the Employment Situation news release [3.3]. Despite the existence of official unemployment rate we are still interested in this figures in order to make the analysis of the topic more objective

The following are brief descriptions of each of the measures:

U1: People who are unemployed for 15 weeks or longer as a percent of the civilian labor force.

U2: Job losers, plus people who completed temporary jobs, as a percent of the civilian labor force.

U3: Total number of people who are unemployed as a percent of the civilian labor force (official unemployment rate).

U4: Total number of people who are unemployed, plus discouraged workers, as a percent of the civilian labor force plus discouraged workers.

U5: Total number of people who are unemployed, plus discouraged workers, plus all other persons marginally attached to the labor force, as a percent of the civilian labor force plus all persons marginally attached to the labor force.

U6: Total number of people who are unemployed, plus all persons marginally attached to the labor force, plus total employed part time for economic reasons, as a percent of the civilian labor force plus all persons marginally attached to the labor force.

Table 2. [3.3]

The general trend could be clearly seen: all indicators ( U-4 to U-6) are following the U-3. And this could be explained by the evidence that within the business cycle fluctuation all indicators change in the same manner. In time of Great Recession all of indicators went up, as an example.

Notion:

The U-3 represent the largest component of the U‑6 numerator, at about 50 percent. At the onset of the most recent recession, there were 7.6 million people who were unemployed. When the recession officially ended in June 2009, the number of unemployed had nearly doubled to 14.7 million, and it continued to rise well into 2010, before beginning to recover.

During the 2007–2009 recession, increases in the number of unemployed and persons working part time for economic reasons were the primary drivers of the increase in U‑6. While unemployment has been decreasing fairly steadily since early 2010, the other two components that make up U‑6 have shown comparatively less improvement. Even so, the U‑6 measure has been trending downward, generally consistent with the movement of U‑3 and the other alternative measures of labor underutilization [2].

The number of persons employed part time for economic reasons (sometimes referred to as involuntary part-time workers) declined by 447,000 to 6.0 million in September. Over the past 12 months, the number of persons employed part time for economic reasons declined by 1.0 million.

In September 2015, 1.9 million persons were marginally attached to the labor force, down by 305,000 from a year earlier.

Among the marginally attached, there were 635,000 discouraged workers in September, little changed from a year earlier. Discouraged workers are persons not currently looking for work because they believe

no jobs are available for them. The remaining 1.3 million persons marginally

attached to the labor force in September had not searched for work for reasons such as school attendance or family responsibilities.

Unemployment by states

Regional and state unemployment rates were little changed in September of 2015 . Thirty-seven states and the District of Columbia had unemployment rate decreases from August, six states had increases, and seven states had no change, the U.S. Bureau of Labor Statistics reported. [3.4]

North Dakota had the lowest jobless rate in September, 2.8 percent, followed by Nebraska, 2.9 percent. West Virginia had the highest rate, 7.3 percent. In total, 19 states had unemployment rates significantly lower than the U.S. figure of 5.1 percent, 12 states and the District of Columbia had measurably higher rates, and 19 states had rates that were not much different from that of the nation.

In September, 11 states had statistically significant over-the-month unemployment rate declines, the largest of which occurred in Missouri, Rhode Island, and South Carolina (-0.3 percentage point each). The remaining 39 states and the District of Columbia had jobless rates that were not measurably different from those of a month earlier, though some had changes that were at least as large numerically as the significant changes.

Twenty-six states and the District of Columbia had statistically significant unemployment rate declines from September 2014, the largest of which occurred in Rhode Island (-1.8 percentage points) and Michigan (-1.7 points). The only significant over-the-year rate increase was in West Virginia (+1.0 percentage point). The remaining 23 states had rates that were not appreciably different from those of a year earlier. [3.4]

In order to visualize the picture, [See application 5]

Among the nine geographic divisions, the West North Central had the lowest unemployment rate, 4.0 percent in September. The East South Central and Pacific had the highest rates, 5.7 percent each

There is no wonder that West regions employment is higher; in South and Pacific areas the labor force consist of Hispanic, Latino, Mexican population. Among these groups there always existed a tendency of high unemployment and lower insensitive to work.

Unemployment by industry type

Table 4. Unemployed persons by industry [3.5]

There may be some questions about how to calculate the UR in particular industry. These calculations are made from the data of changes in frictional and structural unemployment in a particular industry. As an example (Table 4) , if we see that unemployment rate in construction industry has decreased from 7.0 to 5.5 percent, that means that ,in fact, persons who were willing to find the job in this industry finally found it during 2014-2015 (up to the time of estimation), which exactly reflects the change in UR.

If we see a phrase that the employment in particular industry has increased, that means that unemployment in it has naturally increased.

As BLS reports, in September of 2015: [3.5]

«Health care added 34,000 jobs in September, in line with the average increase of 38,000 jobs per month over the prior 12 months.

Employment in information increased by 12,000 in September and has increased by 44,000 over the year.

Employment in professional and business services continued to trend up in September (+31,000. In September, job gains occurred in computer systems design and related services (+7,000) and in legal services (+5,000).

Retail trade employment trended up in September (+24,000. In September, employment rose in general merchandise stores (+10,000) and automobile dealers (+5,000).

Employment in food services and drinking places continued on an upward trend in September (+21,000). Over the year, this industry has added 349,000 jobs.

Employment in mining continued to decline in September (-10,000), with losses concentrated in support activities for mining (-7,000). Mining employment has declined by 102,000 since reaching a peak in December 2014.

Employment in other major industries, including construction, manufacturing, wholesale trade, transportation and warehousing, financial activities, and government, showed little or no change over the month».

From this data we could derive the conclusion that all industries in the USA except the mining, quarrying , oil and gas extraction experienced decrease in unemployment rate , which means that the popularity of them are growing. That also indicates the effective governmental policy, stable economic situation, attractive working conditions for employees.

Concerning the mining and relative industries we could say that the risks and physical efforts ,which are correlated with such type of jobs, are higher than wage, offered by the market. In particular, that means that it is much easier to find the job in IT sphere or somewhere else then face the risks and possess appropriate skills for such industries. In fact, this transition is natural: in post-industrial countries the role of information, health care, service supply is higher than just extraction of resources, though the share of its products (gas, oil) in GDP of the country is still high

Since the time of Great Recession unemployment rate in all industries has declined to its previous level and nowadays become even lower than, say, in 2000.

Today’s macroeconomic policies towards the unemployment, analytical prognostications

How the government tries to lower unemployment in US

Whenever unemployment gets too high – usually above 6 percent – the federal government often tries to step in and create jobs. This is especially important if a high rate of unemployment is cyclical, exists across a broad range of industries and segments of the economy.

The two major tactics the government can employ in its job-creating strategy are changes to its monetary policy and/or changes to its fiscal policies. Different remedies have been applied at different times in US history with different results – and politics always plays a role in whether or when a particular tactic is going to be introduced[5].

1. Monetary Policy

Monetary policy is controlled by the Federal Reserve Bank of the United States, the independent central bank empowered to control the country’s money supply. To stimulate the economy into creating more jobs, the bank often offers help in one of two ways.

One tool is lowering the interest rates in the overall economy so that it is cheaper for banks and businesses to borrow money. The goal is to encourage banks to invest and businesses to expand, stimulating economic vitality and thus bringing about increased hiring.

The second tool is increasing the amount and/or the availability of money in circulation by buying and selling various financial instruments (treasury bills, bonds, etc.). As more money enters the economy, commerce expands and businesses can hire more workers.

1. Fiscal Policy

If the Fed’s expansionary monetary policy is not adequate to reverse the economy’s downward trend, then the federal government will employ various fiscal policies in order to dent continuing high levels of unemployment.

Some things the government can do:

• Cut taxes for businesses and individuals to increase spending and stimulate economic growth.

• Increase government spending in targeted industries in order to spur employment.

• Hire workers to build things like mass transit systems or provide services like infrastructure upkeep and repair.

• Provide benefits to unemployed workers so they can spend on basics like food, clothing and housing, driving retailers and manufacturers to hire more people.

Analytical prognostications

According to “Trading economics” point of view the United States Unemployment Rate is projected to be around 6.30 in 2020, 8.30 in 2030 and 10.30 percent in 2050, according to econometric models.

Table 5. TE forecast [8]

Forecast	Actual	Q4/15	Q1/16	Q2/16	Q3/16	2020	2030	2050	Unit
Unemployment Rate	5.1	5.1	5	4.9	5.1	6.3	8.3	10.3	percent

According to Bloomberg agency data, the forecast of Federal Reserve is that unemployment rate seems to be unchanged up to 2017. The forecast if rather more optimistic than the TE ones. [See: Application 7]

Conclusion:

The problem of unemployment in US was analyzed in this work basing upon the historical experience and value of it in determining the future policy, the current situation on the labor market of the USA, including analytical perspectives and prognostications and current tools and methods, used by government in order to keep unemployment on same low level and to decrease it even more.

Concerning the historical experience the main and decisive conclusion seems to be evident: the self-regulating economy in 1930-th proved its insolvency, that’s why government decided to intervene in market in a whole by providing different policies and in labor market in particular. That’s why till now it has been existed minimum wages, investments in infrastructure, aimed to enlarge the demand for labor and so on.

From the current situation on the labor market we could derive the conclusion that the situation, concerning unemployment is rather stable. The average (states average) unemployment level is held by two month on a point of 5.1 percent ( According to BLS September 2015 report [3.1]) . This figure is quite good for developed country with high unemployment benefits. We should mention here that the deeper analysis of this problem shows us that the real number of people unemployed is rather higher ( could be calculating, taking into account alternative measurement of unemployment, considering discouraged workers, marginally attached and so on) then provided by official one. However, BLS cope with its task greatly and provide vast amount of updated and useful information, connected with employment situation in a whole, inflation rate, productivity, consumer expenditures, producer and consumer price indexes. That’s why any task, concerning accumulating data about macro economical figures in US , could be performed in rather convenient manner. This information main demander is government, which basically provide its policy, basing on macro economical situation.

Finally, while analyzing the sectors of US market, it was estimated that by September 2015 the unemployment rate become lower for all industries, except extraction of natural resources. This fact tells us about the popularity growth of information and information technologies, together with finance industry and health care. These type of industries seems to be more attractive for potential employees. From the point of view of the author of this work, the evidence that the transition to this types of work has happened tells about high level of institutional development and appropriate policy, concerning the labor market.

List of information sources

1. Monographs, collective works, collections of scientific works:

1. Paul Kroogman/ Robert Wells Macroeconomics, 3-rd edition. Textbook.

2. Vernon Brundage, “Trends in unemployment and other labor market difficulties,” Beyond the Numbers: Employment and Unemployment, vol. 3, no. 25 (U.S. Bureau of Labor Statistics, November 2014)

1. Internet sources

1. http://www.bls.gov – Website, aimed on accumulating all sorts of data, considering USA macro economic statistics

   1. http://www.bls.gov/news.release/empsit.nr0.htm - Current report on unemployment situation

   2. http://www.bls.gov/news.release/empsit.t15.htm - Alternative measures of labor underutilization

   3. http://www.bls.gov/opub/btn/volume-3/trends-in-unemployment-and-other-labor-market-difficulties.htm - Article about unemployment on BLS

   4. http://www.bls.gov/web/laus/laumstrk.htm - Unemployment by states

   5. http://www.bls.gov/news.release/laus.nr0.htm - Regional and state unemployment situation summary

2. http://www.census.gov – US federal agency

3. https://www.debt.org/jobs/unemployment/united-states/ - Summary of Al Krulick

4. http://www.localhistories.org/unemployment.html - Unemployment history

5. http://www.statista.com/ - Statistical resource

6. http://www.tradingeconomics.com/united-states/unemployment-rate/forecast - Forecast on unemployment situation, made by “Trading economics” agency

Applications

Application 1

Gini index (2014)

Application 2

World unemployment, 2012

Application 3

Recession of 1980-s and Great Recession http://www.tradingeconomics.com/

Application 4

Historical comparison [bls]

Application 5

Application 6

Application 7

Bloomberg forecast (from Bloomberg laboratory)

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