Unemployment Rate as an Indicator of Economic Health of the Country, Essay Example

Introduction

Labor force is one of the primary units of supply in contemporary business world. This is a total number of people either employed or not, except of those who are under 16 years old or retired. According to Britannica Encyclopedia, “unemployment is the condition of one who is capable of working, actively seeking work, but unable to find any work.” There are five primary types of unemployment, such as frictional, structural, classical, cyclical and seasonal. Frictional unemployment shows the number of people who are temporarily looking for another job and is a result of job turnover. The rate of frictional unemployment is usually small in the developed countries and is one of the features of healthy and stable economy. Structural, classical, and seasonal unemployment occur due to changes within economy, reduction in the demand for labor force, or seasonal nature of the job respectively. These types of unemployment show the weakness of the economy and are considered to be negative factors of the development of the country. Cyclical unemployment is a result of the downturn of the country’s economy. High rates of this type of unemployment show that there is a staff reduction in the country, which occurs because of diminishing demand for goods and services. Unfortunately, cyclical unemployment rate is an indicator of the worst type of unemployment, as it illustrates economic recession level. (Galt)

The US Bureau of Labor Statistics is responsible for calculation of the State and National Employment rates. In fact, approximately 150,000 private and government-owned agencies (about 400,000 employees) are examined each month to get adequate employment/unemployment statistics, job turnover, and salary rates. Unemployment rate shows the average percentage of people who are unemployed, but not the total number of people who are not working for some reasons. In other words, disabled, retired, or those who work at home are not calculated, as they do not belong to the labor force.

The recent employment report released by the Bureau of Labor Statistics saw a nonfarm drop by 663,000 and the rise of unemployment rate to 8.5 percent.(Fox, 2009)  In fact, it appears that this month was fourth in a row with the job losses exceeding 600,000, thus making the job losses from current economic recession remarkably worse than those that occurred during the previous two downturns since the times of Great Depression. Even thought the current unemployment rate is less than 10.8 percent recorder in 1982, it is expected that it will grow further more. Due to the fact that unemployment rate can be a little bit misleading, economic forecasters tend to concentrate on the payroll date, which is derived from a survey 150,000 businesses and government agencies. (Fox, 2009) However, all this employment data clearly states that any kind of slowing in the rate of economic decline has yet to become visible in the job market. Thus, the rise of unemployment rate currently shows us that the economic recession is not over yet, for the fact that margins of error are present in the data.

Natural unemployment rate of 4 – 6 % is a feature of the healthy economy. Economists state that there is certain number of people who are unemployed due to natural reasons, such as job turnover or some economy changes. If fact, unemployment cannot be eliminated in contemporary business world as they only way to employ all people is possible only if the government accepts higher inflation rates, which will bring higher prices. Moreover, in this case unemployment will be eliminated only for a short period of time, as higher prices will increase job turnover and, therefore, bring a new wave of unemployed people. (Friedman 272) In his work, M. Friedman has analyzed this issue and concluded that unemployment had a cyclical nature. Therefore, it is logical to assume that, being of sinusoid form, unemployment rate periodically increases and decreases over time.

The chart “Unemployment rate in 1999 – 2009”, published by the US Bureau of Labor Statistics, shows the tendency of unemployment over the last ten years. In fact, this evidence supports the theory of cyclical flow of the unemployment line. Secondly, this graph shows that the rate of unemployment in the United States was relatively small. The ratio of 7,6 % on January 1, 2009 is associated with the world economic crisis and recession, which is observed on the US market lately. The most interesting fact is that the rising tendency of unemployment (2007 – 2009) is obvious. Assuming that unemployment is recurring process, one can suppose that it will increase and find its peak in 2010 – 2011. “Nonfarm payroll employment continued to decline in April (-539,000), and the unemployment rate rose from 8.5 to 8.9 percent, the Bureau of Labor Statistics of the U.S. Department of Labor reported today” (US Department of Labor 1)

National unemployment rate is an average index that consists of data, which was separately gathered in each state. For instance, according to the special report published by CNN on December 19, 2008, there was a gap of 6,4 % between unemployment rates in Wyoming and Michigan. For instance, Michigan, Rhode Island, California headed the list of unemployment, which was 9,6 %, 9,3 %, and 8,4 % respectively. The lowest unemployment rates were observed in Wyoming, North Dakota, South Dakota, where ratios were 3,2 %, 3,3 %, and 3,4 % respectively. (CNN) This data shows that the rate of unemployment in different states may vary depending on the income of people who live on some specific territory, development of industrial sector, availability of vacant job positions, etc.

Various sources indicate that discrimination of women took place until 1960s. The Civil Rights Act of 1964 and Presidential Executive Order of 1967 supported the rights of women at the workplace. For instance, “from 1960 to the early 1970s the influx of married women workers accounted for almost half of the increase in the total labor force, and working wives were staying on their jobs longer before starting families.” (Compton’s Interactive Encyclopedia) The gap between men and women unemployment rates was lowered and was estimated 1 – 2 % at the beginning of 1970s. The chart 2.0 shows the diminishing gap between adult women and adult men unemployment rates (1970 – 1979 years), which was finally eliminated in the early 1980s.

Unemployment as a signal of economy’s shutdown

In her article “What the unemployment rate signals on the economy”, Rebecca M. Blank states that there is direct connection between high unemployment rate and the recession of the economy in the country. According to the author, increasing rates of unemployment became obvious in 2008. For instance, 20 % of recently unemployed people could not find a new job for more than six months. This ratio was twice as high as the one observed in 2003 and earlier. (Blank) Current unemployment rate of 8.9 % is dangerous for several reasons. People of older age usually find well-paid and stable jobs. Therefore, job turnover in elder population is smaller than that in younger generation. As a tendency of aging labor force is observed recently, scientists are unable to predict future possible unemployment rate. If the older generation will be changed by the younger one, extreme increase in the number of unemployed people may occur. Secondly, unemployment rate seems to be small because the number of available job positions diminishes due to companies’ shutdowns. “If we’re losing jobs, but unemployment hasn’t increased, this means that some people are dropping out of the labor market entirely.” (Blank) Finally, the rising number of people in jails also lowers unemployment index. Based on the evidence discussed above, one can assume that official unemployment rate is lower than the real one. Rebecca M. Blank believes that real unemployment rate will increase for relatively long period of time due to recession, which is observed recently.

Misleading Unemployment Rate

During the last decade there has been a constant doubt of whether the measured unemployment rate is ‘too low’. In other words, the question is whether current unemployment statistics and rates accurately reveal the weaknesses of contemporary labor market. It appears that the most recent economic recession was relatively temperate. During the economic recession in 2003, the official unemployment rate rose to 6.3 percent, and real GDP declined by 0.5 percent, if compared with a 1.3 percent decline in the 1990-91 recession.(Barrow, 2004) Currently, there are multiple reasons and factors to believe that unemployment rate does not accurately reflect labor market strength, thus it has to be put into a broader context, to be compared with previous recessions in economy. Even though the lower unemployment rates reached the most recent economic recession, there still has been no significant sign of recovery in the labor markets as measured by increases in payroll employment in the Bureau of Labor Statistics (BLS) Establishment Survey. Consequently, the 2001 recovery is usually compared with so-called jobless recovery, which occurred in 1991. However, one year after following peak employment levels, the series begin to diverge in comparison. After two years from the maximum employment dates, the average economic recovery raised employment levels above the maximum achieved previously. For example, “payroll employment in June 1992 is 1.1 percent below peak payroll employment in June 1990, and payroll employment in March 2003 is 2 percent below employment in March 2001”.(Barrow, 2004)

In fact, the attempt to move people with higher average rates of unemployment out of the labor force will result in the decrease of the official unemployment rate. This rate is calculated from the data of the survey conducted by the BLS Current Population Survey (CPS), which surveys a sample of about 50,000 representatives of occupied households. This sample includes individuals older than 15 years and ones that are not in the armed forces, excluding persons living in institutions such as prisons and nursing homes. The fact that this rate is calculated through survey data, implies the dependence of employed, self-employed, unemployed, and the number of persons in and out of the labor force on the individuals’ responses to questions about their reference week activity. “Individuals are classified as unemployed if they report that they were not employed but were actively searching for employment.”(Barrow, 2004) Therefore, when discouraged workers and those who seek openings outside the labor market exit the labor force, all else equal, the number of unemployed falls, the number of people in the labor force falls, and the unemployment rate falls consequently. Consequently, one can conclude that measured unemployment rates may not accurately reflect the weakness of the labor market. Merely because when businesses are hiring, discouraged workers usually come back in to the labor force and start their active search for job position. However, up until they obtain occupation, they are considered to be unemployed. Therefore, the unemployment rate can rise in such situation, just when the number of jobs in fact is increasing. Thus, unemployment rate ties you to the particular and strict way in which it is measured and determined.

Unemployment Rate as an indicator of economy’s effectiveness

Every person considers unemployment to be a negative indicator, which shows weakness on economy in the country. Therefore, government should eliminate it. Some scientists state that it is just an indicator, which is neither negative nor positive. The only thing government can do to improve the situation is to do nothing. Richard Vedder and Lowell Gallaway have examined various attempts of government to regulate unemployment rate and concluded that every single effort of the officials to stabilize the economy and create more jobs was catastrophic for the US economy. In 1907, Federal Reserve System, created by Congress, caused doubling inflation rates and 12 % unemployment rate. In his attempt to stabilize the economy in 1929, Herbert Hoover implemented the politics of high wages. Salaries were artificially raised to combat inflation rates and to reduce unemployment among US citizens. The prices skyrocketed during the next two years. “Recovery began in March 1933, but double-digit unemployment remained for seven more years.” (Vedder 44) Failure to decrease inflation rate in 1970s was associated with OPEC politics of increasing price for oil. Government officials stated that rising stagflation was a result of great inflation connected with the new prices on oil that tripled. In fact, unemployment rate doubled from about 6 % in 1960s. However, the prices for oil were increased later, when unemployment rate has already been 12 %. The evidence proposed by the scientists shows ineffectiveness of government regulations of this issue. They address unemployment just a part of economy, which cannot be eliminated. The only way to somehow diminish unemployment rate is to support private sector with subsidies as small privately owned firms are mostly affected by high inflation and, therefore risk of shutdown.

Conclusion

Unemployment rate is a complex indicator that shows general “heath” of the economy. The lowest unemployment rate of 4,1 % during the last 40 years was observed in 1999, when B. Clinton was elected President. This index was equal for both men and women on the territory of the United States. Current unemployment rate of 8,9 % is connected with global economic crisis. The evidence provided in this paper reveals the fact that unemployment rate will increase for several years. Moreover, the real unemployment rate can be higher than the official one. Economic recession has definitely affected our country. Nonetheless, compared to the total labor force, employment rate of the United States is one of the highest in the world even now.

Works Cited

Barrow, Lisa. “Is the Official Unemployment Rate Misleading?” Economic Perspectives. 28 (2004).

Blank, R. 2009. What the unemployment rate signals on the economy. The Brookings Institution. May 14, 2009. <http:/ /www.brookings.edu/opinions/2008/0404_ unemployment_blank_kerr.aspx>.

CNN. 2008. Unemployment State by State. CNN. May 14, 2009. <http:/ /money.cnn.com/pf/features/lists/state_unemployment/>.

Compton’s Interactive Encyclopedia. 1994. Women’s History in America Presented by Women’s International Center. May 14, 2009. <http:/ /www.wic.org/misc/history.htm>

Fox, Justin. “Unemployment Rise Shows Recession Far from Over.” The Time. 14 May, 2009 <http://www.time.com/time/business/article/0,8599,1889402,00.html>.

Friedman, M. 1976. Inflation and Unemployment. The University of Chicago, IL. May 14, 2009 <http:/ /nobelprize.org/nobel_prizes/economics/laureates/1976/friedman-lecture.pdf>, p. 272.

Galt, J. 2007. Understanding Different Types of Unemployment. May 14, 2009. http:/ /www.associatedcontent.com/article/412334/understanding_different_types_of_unemployment.html?cat=3.”unemployment.” Encyclopædia Britannica. 2009. Encyclopædia Britannica Online. 14 May. 2009 <http://www.britannica.com/EBchecked/topic/614368/unemployment>.

US Department of Labor. 2009. Labor Force Statistics from the Current Population Survey. May 14, 2009. <http:/ /www.bls.gov/cps/cps_htgm.htm#def>.

The Employment Situation: April 2009. Economic News Release. Washington, D.C., May 14, 2009. <http:/ /www.bls.gov/news.release/empsit.nr0.htm>, p. 1.

Unemployment Rates for Adult Men and Women have stayed quite close since the early 1980s. May 14, 2009. <http:/ /www.bls.gov/cps/labor2005/chart5-3.pdf>.

Vedder, R., Gallaway. L. 1992. How to Increase Unemployment: Historically, the Worst Thing Government Can Do about Unemployment Is Try to End It. May 14, 2009.Volume: 44. Issue: 22.