Economics
Unemployment as a constructive aspect of economic life
Unemployment is a negative economic phenomenon that refers to that part of the active population that is willing and able to work for pay, but is unable to find employment, due to an unstable relationship between economic development on the one hand, as a source of labor demand, and population’s evolution on the other hand, as a source of labor supply.
On a long-term, unemployment is undoubtedly considered to be a negative phenomenon, with great costs for both the directly affected persons and the economy and society as a whole. In the United States the unemployment rate for 2006 reached 4.6%, with an unemployment level of 7,001,000. Puerto Rico has the highest unemployment rate, 9.9% in November 2006, while Hawaii has the lowest unemployment rate, 2.3% in November 2006.
to an increased level of poverty and crime. It also causes political instability and mental health problems.
However, a low unemployment rate may help prevent and diminish mass poverty and violence. Short and medium term unemployment in considered to have certain economic advantages as well. The most important advantage for the economy is that unemployment tends to reduce inflation, following the Phillips curve, or to decelerate inflation, following the NAIRU/natural rate of unemployment theory. The the relationship between unemployment and inflation. On the short-term, inflation in inversely related to unemployment. If unemployment rises, inflation drops, while if unemployment drops, inflation rises. This phenomenon described by the Phillips curve tends to be a problem for regulators who want to keep both the inflation and the unemployment at low levels. However, is completely different to the short-term one. On a long-term, no correlation between inflation and unemployment has been observed. The long-term Phillips curve is considered by the classical economists to be the equilibrium level of unemployment of the economy, representing the independence between unemployment and inflation on a long-term. The intersection between the short-term and the long-term Phillips curve represents the expected level of inflation. Therefore, unemployment between natural unemployment leads to a higher level of inflation than expected, while unemployment higher than natural unemployment leads to a lower level of inflation than expected. So, when unemployment reaches a high level, costs rise less rapidly than prices, forcing inflation to slow down. Also, when employment reaches a very low level, this will cause costs to rise faster than prices, forcing the inflation to speed up.
However, when situated in between these two extreme levels, the rate of unemployment is high enough that costs and prices rise at the same level, so inflation stagnates. This rate of unemployment level is called the NAIRU, of unemployment. As the unemployment decreases, employees demand higher wages and consequently the producers rise the prices of their products and services in order to gain higher profits. But it seems that “the importance of NAIRU is more theoretical than practical, because the rate is a moving target, shifting from business cycle to business cycle with the changing structure of the economy.”
Another aspect where unemployment may be considered beneficial concerns the frictional employment, that involves people being temporarily between jobs and searching for new ones. Frictional unemployment only covers a small percentage of the unemployment, because workers can search for new jobs while being employed and employers can search for new employees before firing current ones. So, this type of unemployment allows employers not to settle for employees that do not correspond to their needs. A lower level of unemployment also allows workers to find better jobs that satisfy their desires and needs.
Unemployment is also considered to be constructive because it encourages labor productivity and profitability. In certain cases, employers tend to keep their employees in fear of losing their jobs, which determines them to work harder and to work under low wage conditions: “in his seminal 1943 paper on the political business cycle, Michael Kalecki (1971) argued that ‘industrial leaders’ feared full employment because the economic insecurity created by unemployment was necessary to keep wages low and maintain work intensity and discipline on the shop floor.” Kalecki’s opinion was based on the treatment used by some employers on their employees. Some employers put the threat of dismissal in the center of the motivational strategy. This negative motivation technique was mostly used in the 1930’s, while nowadays it is rarely used.
Another advantage of unemployment is that it helps limiting an accelerated growth of the Gross Domestic Product (GDP) that cannot be supported for of time because of the resource constraints and environmental impacts also. If the employment rate is high, human resources are not used at their best capacity, which leads to wasting opportunities to produce goods and services, causing problems for the economy on a long-term.
Unemployment also encourages certain people to start their own business. Most of these people are former employees previously trapped in dead-end jobs with no future, that after being fired from their jobs found the courage and the motivation so start a business of their own. This way, many little companies are coming along quite nicely. These small companies create labor demand that is satisfied by unemployed workers, therefore diminishing the unemployment rate on a medium term.
Unemployment determines a better prepared labor supply. Inactive professional periods determine unemployed people to take certain classes to qualify for another job, unemployment providing them the time and motivation for taking classes to improve their professional skills. On a long-term, the labor market will enrich itself with highly trained professionals.
Unemployment may also be responsible for the migration of unemployed population to under populated areas, where the work supply is very low. This creates a balanced population distribution on a territory, influencing in a positive way the economic life of certain regions.
The natural functioning of the labor market can only be attained with natural unemployment, whose rate corresponds to full employment. Therefore, the rate of natural unemployment ensures macroeconomic balance.
Each unemployment type affects the economy in a different way and has a different impact. Cyclical unemployment appears when there is not enough aggregate demand for the labor. This causes professional reorientation. Workers found in this situation will change their professional profile by orienting towards other jobs for which the labor market is not saturated, therefore satisfying the labor demand in other professional areas.
Frictional unemployment involves people being temporarily between jobs. It is also referred to as search unemployment, since people involved in it are searching for a new job. In some situations is considered to be constructive, because it helps both workers to find the exact job that best fits their qualifications, skills, abilities and needs, and employers to find the best suitable candidates.
Marxian unemployment is when unemployment threat is used to determine employees to work hard and to have low wage expectance.
All in all, unemployment is generally a negative phenomenon that causes important problems for any economy, but a low level of unemployment may be considered constructive, as it presents certain advantages. A low rate of unemployment helps reduce or decelerate inflation, it encourages labor productivity and profitability. Another important positive aspect is that it helps limiting an accelerating growth of the Gross Domestic Product. If kept under control at a certain low level, unemployment can help a nation’s economy and contribute to its health. In every healthy and balanced national economy unemployment exists, but it is kept at a low rate. Low unemployment rate also has certain advantages on a social level.
Reference List
Labor Force Statistics from the Current Population Survey (2006). U.S. Department of Labor. Bureau of Labor Statistics. Retrieved January 11, 2007 at http://www.bls.gov/cps/home.htm.
U.S.: Low Unemployment Raises an Old Inflation Debate (2006). Business Week online. Retrieved January 12, 2007 at http://www.businessweek.com/magazine/content/06_08/b3972038.htm.
Rebitzer, James B. Unemployment, Labor Relations, and Unit Labor Costs (1988). The American Economic Review. Vol. 78. No. 2. Retrieved January 11, 2007 at http://links.jstor.org/sici?sici=0002-8282%28198805%2978%3A2%3C389%3AULRAUL%3E2.0.CO%3B2-U&size=LARGE.
Labor Force Statistics from the Current Population Survey (2006). U.S. Department of Labor. Bureau of Labor Statistics. Retrieved January 11, 2007 at http://www.bls.gov/cps/home.htm.
U.S.: Low Unemployment Raises an Old Inflation Debate (2006). BusinessWeek online. Retrieved January 12, 2007 at http://www.businessweek.com/magazine/content/06_08/b3972038.htm.
Rebitzer, James B. Unemployment, Labor Relations, and Unit Labor Costs (1988). The American Economic Review. Vol. 78, No. 2. Retrieved January 11, 2007 at http://links.jstor.org/sici?sici=0002-8282%28198805%2978%3A2%3C389%3AULRAUL%3E2.0.CO%3B2-U&size=LARGE.
