Unemployment, enforced idleness of members of the workforce who are able and willing to work but cannot find jobs. In societies in which most people can earn a living only by working for others, being unable to find a job is a serious problem. Because of its human costs in deprivation and a feeling of rejection and personal failure, the extent of unemployment is widely used as a measure of workers’ welfare. The proportion of workers unemployed also shows how well a nation’s human resources are used and serves as an index of economic activity.
The most common method of measuring unemployment was developed in the United States in the 1930s; it is followed by many other countries on the recommendation of the International Labor Organization. In a monthly survey of a sample of households representing the entire civilian population, information is obtained about the activity of each person of working age. To ensure precision and ease of recollection, the interviewers ask what people were doing in a single week. A person who did any work during that week for pay or profit, worked 15 hours or more as an unpaid worker in a family business, or had a job from which he or she was temporarily absent, is counted as employed. A person who was not working but was looking for work or was on a temporary lay-off and available to take a job is counted as unemployed. The number of unemployed is then divided by the number of people in the civilian labor force (that is, the sum of the employed and the unemployed) in order to calculate the unemployment rate. In some countries, instead of a special survey, unemployment estimates are developed from data on the number of people who are looking for work through the public employment offices or the number receiving unemployment compensation payments.
Economists have described the causes of unemployment as frictional, seasonal, structural, and cyclical.
Frictional unemployment arises because workers seeking jobs do not find them immediately; while looking for work they are counted as unemployed. The amount of frictional unemployment depends on the frequency with which workers change jobs and the time it takes to find new ones. Job changes occur often. A considerable degree of unemployment is frictional and lasts only a short time. This type of unemployment could be reduced somewhat by more efficient placement services. When workers are free to quit their jobs, however, some frictional unemployment will always be present.
Seasonal unemployment occurs when industries have a slow season, such as construction and other outdoor work in winter. It also occurs at the end of the school year, when large numbers of students and graduates look for work.
Structural unemployment arises from an imbalance between the kinds of workers wanted by employers and the kinds of workers looking for jobs. The imbalances may be caused by inadequacy in skills, location, or personal characteristics. Technological developments, for example, necessitate new skills in many industries, leaving those workers who have outdated skills without a job. A plant in a declining industry may close down or move to another area, throwing out of work those employees who are unable or unwilling to move. Workers with inadequate education or training and young workers with little or no experience may be unable to get jobs because employers believe that these employees would not produce enough to be worth paying the legal minimum wage or the rate agreed on with the union. On the other hand, even highly trained workers can be unemployed if there is insufficient demand for their skills. If employers practise discrimination against any group because of sex, race, religion, age, or national origin (in defiance of equal opportunity legislation), a high unemployment rate for these workers could result even when jobs are plentiful. Structural unemployment shows up most prominently in some cities, in some occupations or industries, for those with below-average educational attainments, and for some other groups in the labour force.
Cyclical unemployment results from a general lack of demand for labour. When the business cycle turns downwards, demand for goods and services drops; consequently, workers are laid off.
A major policy issue is the relation of unemployment to inflation. In theory, when demand for labour rises to the point at which unemployment is low and employers find it difficult to hire qualified workers, wages increase, pushing production costs and prices higher and thus contributing to inflation; when demand declines and unemployment increases, inflationary pressures on wages and production costs are relieved. Confounding this theory, however, both inflation and unemployment rates were high in the 1970s—a combination known as stagflation.
IV. THE GREAT DEPRESSION
The most widespread, protracted, and severe period of mass unemployment in modern times was the Great Depression, which followed the Wall Street Crash in 1929. The depression left 14 million unemployed in the United States, 6 million in Germany, and 3 million in Great Britain. In Australia the crisis was especially severe, with over 35 per cent of the workforce being unemployed by the early 1930s, many of whom remained so until World War II. Social dislocation, widespread migration in search of jobs, and political extremism became commonplace. Deaths from malnutrition-related diseases increased substantially across the industrialized world.
The Great Depression caused substantial shifts in attitudes towards unemployment, expressed particularly in the New Deal policies of US President Franklin D. Roosevelt, who introduced social security, unemployment benefit, and public works programmes to utilize surplus labour. The economic recovery produced by these measures demonstrated that unemployment actually worsened a depression by causing a slump in demand, and that payment of unemployment insurance was a far lesser burden to the economy than the loss of unemployed workers’ spending power. The depression also inspired John Maynard Keynes to write his greatest work of economic theory, The General Theory of Employment, Interest, and Money (1936), which stated that an economy in depression would remain so unless revived by government spending. He thus induced a tendency in Western governments to diminish unemployment by running up large budget deficits.
V. MODERN UNEMPLOYMENT
The post-World War II period in Europe was characterized by sharp rises in unemployment resulting from the wartime destruction of many industries, the addition to the labor force of large numbers of war veterans, and a variety of consequent economic maladjustment. US aid under the European Recovery Program (or Marshall Plan) helped the highly successful efforts of Western European countries to rehabilitate their industries and provide employment for their workers.
Most of the major non-socialist industrialized countries had low rates of unemployment by the 1950s. In the 1960s, when the US unemployment rate averaged 5 to 6 per cent, only Canada had a higher rate (7 per cent); Italy had a rate of 4 per cent, and all the other Western European industrial nations, as well as Japan, had rates of about 2 per cent or less. Attempts to explain these disparities focused on social and economic differences among nations, including the following: measures taken in European countries to reduce seasonal unemployment by spreading work over the year; European practices of placing youth in their mid-teens into apprenticeship and other work-training arrangements that promoted job stability; legal restraints in some countries against laying off workers; extensive retraining programmes for unemployed workers to update their skills; and attachment of workers to their jobs in both Europe and Japan. However, by the 1990s this situation had been largely reversed with the US unemployment rate being well below that of most European countries. This persistent high unemployment within the European Union was attributed to structural problems and inappropriate labour legislation driving up the costs to employers of employment, a diagnosis borne out by the example of the United Kingdom, where reform of the labour market during the 1980s apparently resulted in higher rates of job creation. By 2004 unemployment in the UK had been reduced to about 1.4 million—a rate of 4.8 per cent of the workforce—from a high of more than 3 million in 1986.
In developing nations in Asia, Africa, and Latin America a much more serious and widespread problem is underemployment—that is, people are employed only part-time or at work that is inefficient or unproductive, with a correspondingly low income that is insufficient to meet their needs. Much of the unemployment and underemployment in developing nations has accompanied migration from rural to larger urban centres.
In industrialized countries, with unemployment insurance and other forms of income maintenance, unemployment does not cause as great a hardship as it once did. Nonetheless, there are signs that unemployment is becoming a far more intractable feature of certain developed economies than hitherto thought, especially with the replacement of Keynesianism by monetarism as the predominant economic creed. France, Italy, and Spain in particular face the problem of apparently ineradicable high structural unemployment, while other countries, such as Japan, which at first seemed able to sustain low unemployment rates through recessions through practices that would be denounced as crippling by many other countries, are increasingly forced to make redundancies in the manner of other advanced economies. The problem of modern governments is how to get the benefits of economic flexibility and rising productivity while reducing the number of unemployed workers, keeping their spells of joblessness short, maintaining their income, and helping them return to work with viable skills.