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Economic Basics Part 5: Unemployment
Video SummaryWhat is unemployment? Is it always a bad thing? What kinds of unemployment are there, and what causes them? |
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So let's start with the definition of unemployment, and this is the very same definition our government uses to collect unemployment statistics: Someone who is unemployed is currently not working, but is willing to work and able to work for pay and is actively searching for work. The Bureau of Labor Statistics uses this definition to find the ratio of unemployed workers to the total labor force, both employed an unemployed. That ratio is the unemployment rate. Voluntary UnemploymentVoluntary unemployment is essentially people being unemployed voluntarily, just what it says. The usual instinct when someone is first introduced to this concept is, "Why would anyone want to be unemployed?" Consider what happens when you change jobs. That's called Frictional Unemployment. It's, "Take this job and shove it!" So you quit your job, you go and find a better job, but in that little interum when you're changing jobs, if the Bureau of Labor Statistics calls you up and asks you about your current working conditions, you say, "Well, I'm not working and a job, and I'm looking for a job." You're counted as unemployed. Another way this can happen is if you're a contractor. So if you're, say, a carpenter, you go to different firms, and one day you're building a house, one day you're building an office building, one day you're building a deck for someone The third thing the cause is voluntary unemployment is changing industries. The quintessential example is that, when cars started becoming more and more popular, the people who made buggy whips didn't have as much business. This voluntary employment is a good thing for the economy. Tt helps progress, it helps labor resources be used as efficiently as possible, and ultimately results in more people being employed and making more money. Involuntary UnemploymentIt's the involuntary employment that people are concerned about, and that's mostly what people think about when you say unemployment. We're not just talking about people losing their jobs or being laid off; we're looking at this economy-wide: The total number of people who do not have work and who are looking for work, but not because of voluntary unemployment. This can happen for a number of different reasons. These can be divided into two types: Perpetual unemployment and cyclical unemployment. Perpetual Unemployment
Perpetual unemployment is probably the biggest thing to be concerned about. One of the big things that causes perpetual unemployment is wages being too high. We saw this in Part Four with the Minimum Wage. The government sets the Minimum Wage above the equilibrium level (that's the definition of the wage being too high, the wage is set above the equilibrium), and this is classical unemployment. The wage for whatever reason is too high, it might be the minimum wage, it might be due to the influence of unions (although usually not because they're mostly just trying to keep up with inflation), or any number of other factors. Most perpetual unemployment is due to government, not only Minimum Wage, but also various different regulations. For example, as a business you must provide insurance to your employees, and this insurance plan must cover this and that and this other thing, too. Now, if a lot of us had our choices, we'd winnow that down and get cheaper insurance, but we don't have that choice. The result is that it raises the effective amount that the worker is paid. But since those benefits tends to have a higher cost than the employee might otherwise be willing to pay on his own, it gets overpriced and effectively it's the same thing: the wage gets too high and you end up with classical unemployment. Cyclical UnemploymentCyclical unemployment is when unemployment goes in cycles, and this is usually because the business cycle. It's based on total production. We ramp up and we get up the total production, and we've got an economic boom going on. Unemployment is low, but then production goes too high, above the level of total production, the bubble bursts, and the economy corrects itself by increasing unemployment. This happens every so often: the Fed just keeps putting money into the system, and the result is an economic boom, and people sing "Happy Days Are Here Again." But the prosperity is an illution. What's really happening is that the new money being injected tends to make things over-valued. That's what happened in 1929: the stock market was overvalued because of the Fed injecting new money into the system. When the Fed started worrying about inflation, they panicked and they hit the breaks on money supply, the bubble burst, the stock market crashed, and the rest is history. In a free market everyone should be voluntary players. There should be a equilibrium where everyone who wants to work at a certain price level should be able to find a job at that price level, the price level being the wage, of course. It happens for several reasons. The biggest reasons his government, and it happens because helping usually hurts. Even things like health and safety regulations have unintended consequences. When you're employed by a firm, they probably pay two to three times your salary or your wage just employing you, and of course you only get your wage and your benefits, but they've got all this other stuff that they have to do just to comply with government regulations, simply because they hired you. This overvalues your job. With involuntary unemployment you get less productivity, and there's also a big cost to society. That leads to more poverty, which leads to more welfare, which means the taxes have to be increased, if taxes are increased the reward for work is reduced, and guess what? That leads to more unemployment and the cycle continues anew. It's a vicious cycle, and it's unsustainable. And the more it happens, the worse things get. Now let's talk about things that do not cause unemployment, although a lot of people think they do. New technology
To this day, there are people who might be refered to as neo-Luddites, who are saying that all of the technology is taking their jobs. But that's not really what's happening. What's happening is that the person who was having this job screwing a bolt into a car door represents a labor resource that is now freed up and can be used more productively. By having the robot build the car you free up labor resources and it's easier to make more cars, the price of cars goes down, the number of cars being sold goes up, and if anything it will result in better employment, and not just a lower level of unemployment, but the quality of the jobs that people have go up. ImmigrationAnother thing that does not cause unemployment is immigration. So you have an immigrant who comes in and does the job for minimum wage when you're being paid three dollars over minimum wage, and people say that that crowds out the employment for everyone else. It really doesn't, and the people who think that are running afoul of Lesson One again. These immigrants don't just represent workers, they're also consumers in the economy. They get money. They're going to buy food with that money. They're going to rent a place to say with that money. And if it is true that you've lost your job to an illegal immigrant who's being paid below the Minimum Wage, that means that that job represents something: that the minimum wage has caused unemployment levels and you just happened to be one of the lucky ones who could demand the new salary. But the salary or the wage is trying to get to equilibrium; they can't do that in the white market, so it has to do it in the grey market. Start Studying
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