Issues in Macroeconomics
3. Unemployment

Unemployment means not having a job even when you want to work and are actively looking for it. For Mary and Carl, laid-off in 1992 from their jobs in the steel industry, being unemployed meant a drastic reduction in living standard, and a host of psychological and social problems, such as low self-esteem and marital or family strife. Sitting on the sidelines is painful in a society that sets great value on work and material success. Carl took a job cleaning office buildings nights, but still he felt like he was on the sidelines, given his skill set and mature work experience. Many people actually define themselves by the work they do-teacher, secretary, electrician, vice-president of sales, The Boss. In Arthur Miller's play, Death of a Salesman, the protagonist, Willy Loman, did not just work as a salesman. He was a salesman. Being a salesman, he reveals throughout the play, was his way of being human. Professors tend, you'll find, to be that way. When Loman lost his job he lost his identity. Meet a man who is A.B.D.-"All But the Dissertation" completed for the doctoral degree-and you will meet a man with a gray cloud over his head. Meet a retired professor who is sitting in her office and you will meet a person who makes little distinction between work and play. Work isn't everything, and its importance to status and personal fulfillment varies by culture. There is at least one island in the South Pacific-visited, it's been said, by the French painter Paul Gauguin-on which the native language contains no words or meaning for our "labor versus leisure" or "work versus play" antagonisms. Apparently people on that island just "do stuff." But when asked in most countries, "What do you do?", few people are proud to answer, "I'm unemployed."

Just where to place the emphasis on employment is ultimately a cultural, or even a individual, decision. In some Native American communities having any paying job off of the reservation is enough to make mother proud. It's understandable, given the poor labor market situation of most Indian reservations. "He has a nice job," a woman told Ziliak of her son, while he was visiting a reservation near Albuquerque, New Mexico. Her son, he later learned from another source, cleaned bathrooms in a federal building. By mother's standard it was a nice job; "all labor has dignity," Martin Luther King, Jr. said, and this toilet-cleaning job allowed the family to consume something other than government cheese. (We think this is fun, Renee worries that she has to learn this.)

In the America that John Steinbeck described in his 1939 novel The Grapes of Wrath, many of the unemployed-though not, importantly for the point of the novel, the central characters-lost all hope. In the 1930s government offered little in the way of welfare and unemployment benefits; for many people, not having a job meant homelessness, hunger, and migration. Even now in the United States, with some guarantee of income support, unemployment means frustration and deprivation. Incidence of alcohol abuse, domestic violence, and other crime tends to rise with unemployment, along with that of other indicators of stress.

Speaking Economics: Economic Literature

Many novels deal directly with economic issues. Famous examples are Zola's Germinal, Victor Hugo's Les Miserables, Ralph Ellison's Invisible Man, George Orwell's Animal Farm, Upton Sinclair's The Jungle, and Harriet Beecher Stowe's Uncle Tom's Cabin. John Steinbeck's The Grapes of Wrath (1939) deals with economic issues both explicitly and movingly. The following passage captures some of what it meant to be unemployed in the 1930s:

And the migrants streamed in on highways and their hunger was in their eyes, and their need was in their eyes. They had no argument, no system, nothing but their numbers and their needs. When there was work for a man, the men fought for it--fought with a low wage. If that fella'll work for thirty cents, I'll work for twenty-five.

If he'll take twenty-five, I'll do it for twenty.

No, me, I'm hungry. I'll work for fifteen. I'll work for food. The kids. You ought to see them. Little boils, like, comin' out, an' they can't run aroun'. Give 'em some windfall fruit, an' they bloated up. Me, I'll work for a little piece of meat.

And this was good, for wages went down and prices stayed up. The great owners were glad and they sent out more handbills to bring more people in. And wages went down and prices stayed up. And pretty soon now we'll have serfs again.

And now the great owners and the companies invented a new method. A great owner bought a cannery. And when the peaches and the pears were ripe he cut the price of fruit below the cost of raising it. And as cannery owner he paid himself a low price for the fruit and kept the price of canned goods up and took his profit. And the little farmers who owned no canneries lost their farms, and they were taken by the great owners, the banks, and the companies who also owned the canneries. As time went on, there were fewer farms. The little farmers moved into town for a while and exhausted their credit, exhausted their friends, their relatives. And they too went on the highways. And the roads were crowded with men ravenous for work, murderous for work.

And the companies, the banks worked at their own doom, and they did not know it. The fields were fruitful, and starving men moved on the roads. The granaries were full and the children of the poor grew up rachitic, and the pustules of pellagra swelled on their sides. The great companies did not know that the line between hunger and anger is a thin line. And money that might have gone to wages went to gas, for guns, for agents and spies, for blacklists, for drilling. On the highways the people moved like ants and searched for work, for food. And the anger began to ferment (Chapter 21, Penguin Books, 1976, pp. 312-313).

Unemployment is, economically speaking, wasteful. When the unemployment rate-the percentage of the work-eligible labor force that is seeking but not finding gainful employment-reaches, say, a quarter of the workforce, as it did in the United States in 1933, a quarter of the economy's ability to produce is being squandered. Individual loss becomes society's loss. The skill of a steelworker is tossed away when the Pennsylvania steel mills close. The education of a historian is wasted if she can find only clerical work.

Technically speaking, an economy with substantial unemployment is producing inside its production-possibility curve. It is producing less than it could, perhaps much less, like a Goliath standing idle on the street corner.

Figure 20-1 Unemployment Implies That the Economy Is Producing Inside Its Production-Possibility Curve
Caption: At the point labeled "High Unemployment" the economy is producing fewer houses and loaves of bread than at the point labeled "Full Employment." The economy can't produce at the point labeled "Impossible Level of Employment" because there are not enough workers to produce the quantities of food and defense at that point.

McCloskey: There's no doubt that unemployment is a problem. But let's not jump to conclusions and declare that it means that something is wrong with the market. The problem will go away if we give the markets a chance. Then wages will go down and employers will hire more people. It's government regulations that prevent that from happening.

Klamer: You may be right that government regulations contribute to the unemployment problem. But markets are not necessarily the solution. Markets can collapse by themselves, without government meddling, as they did in the thirties. I just don't share your faith in the ability of markets to adjust quickly. It takes time. Meanwhile people like Carl and Mary are without jobs. A caring society will do whatever it can to ease their pain.

Ziliak: Maybe so. Still, look at Europe. The European Community cares for its unemployment rate is almost double that of the U.S.. It's possible to care too much.

Klamer: Yes. And it's possible to care too little.

Defining and Measuring Unemployment

How many people were unemployed in the United States in 2005? Or as the question is usually phrased, what was the 2005 unemployment rate in the United States? How about in England or Holland or South Africa?

The unemployment rate is the percentage of all the people in the labor force who are out of work but actively seeking to find it.

Who are included in the labor force?

The labor force comprises all the people who are working for pay (including both self-employed and wage-earners) or who are looking for work.

On the first Friday of each month the U.S. Bureau of Labor Statistics (BLS) announces the national unemployment rate and the evening newscasters invariably report it. The unemployment rate is one of the most closely watched indicators of the economy's health.

In December 2005 the BLS reported that the unemployment rate for the preceding month was 4.9 percent (about 5.1 percent for the year). Was that high? It depends. High compared to what? Figure 20-2 shows the fluctuations in the U.S. unemployment rate for the years 1955 through 2004. An unemployment rate of 4.9 percent would have seemed high in the late 1990s and early 2000s, splendid for the period 1970 to mid-1990s, and all but impossible during the Depression of the 1930s. Even during the 1950s the rate hovered around 4.5 percent. Some degree of unemployment is unavoidable, since there will always be people searching for jobs.

Figure 20-2. The U.S. Unemployment Rate, 1979 - 2004
Caption: Compared to the 1970s and 1980s, the U.S. economy has been doing well on the unemployment front.

Comparing the U.S. unemployment rate to the unemployment rate of other countries is chancy, because countries collect the numbers in different ways and the statistics are not always precisely comparable. Figure 20-3 shows the unemployment rates for the United States and various other industrialized countries in 2004 and 2005. The 7.1 percent average would be high for Japan and low for Spain.

Figure 20-3: Unemployment Rates in Various Countries, 2005.

Note: United States and Japan have very low rates of unemployment in 2005. Italy, Portugal, and especially Spain and France were struggling with a more significant unemployment problem. The numbers with the asterisk (*) are averages based on of the first three calendar quarters of 2005, the most recent information at the time of publication.

Treat the official number for the U.S. unemployment rate with caution. Like all economic "facts," the unemployment rate is a humanly constructed fact, based on nevertheless scientific estimates. Since no register is kept of all workers and all unemployed, the BLS has to go out to search for information. Each month hundreds of Bureau interviewers survey (and sometimes visit) some 60,000 households throughout the country. After getting some general information about the household, the interviewer asks,

"What were you doing most of last week: working, keeping house, going to school, or something else?"

If the answer is "working," the person is counted as in the labor force and working.

If the answer is "housekeeping" or "going to school," the person is counted as "not in the labor force," officially speaking. Studying for a midterm exam or taking care of a family of four children under the age of six is hard work, but it is not officially regarded as working in the marketplace for pay.

To be counted officially as unemployed one has to answer "something else" to the first question, and also meet five other criteria. The unemployed person:

1. Must have actively searched for work during the past four weeks. (A "discouraged worker" is one who has given up trying to find a job; discouraged workers are not counted in the official unemployment numbers.)

2. Must be at least 16 years old and able to take a job if one is offered. (A work-disabled person is not counted as unemployed; he or she is not in the labor force.)

3. Must not have done any work during the preceding week. (As little as one hour on a job is enough to put a person in the "employed" column; the survey will ask the number of hours worked and the type of work done.)

4. Must not be housed in a prison, mental health center, or other full-residential institution.

5. Must not be waiting to be called back to a previous job (such as a union job in the auto or construction industry, with built-in seasonal layoffs) within the next month.

In short, only those who are without any work at all and who are actively looking and available for work are officially regarded as unemployed.

To repeat, the unemployment rate reported by the BLS is an estimate based on a probability sample and on the answers given by the people sampled. So it is not perfectly accurate. Moreover, several potential biases may influence the figure reported. Those biases have to do with certain decisions that underlie the published rate.

The actual unemployment rate would be lower than reported:

• if the briefly unemployed were left out. The rationale for leaving them out would be that these people are not suffering real hardship. Most likely they are in between jobs or are taking a little unpaid vacation.
• if the voluntarily unemployed were excluded - that is, those who could get a job but didn't take it because, for example, they considered the pay too low. Think here of the person trained to be a teacher who refuses to work as a taxi driver and decides to hold out until a teaching job comes along.
• if people who were working but who did not admit it were included in the labor force. (A larger labor force would bring down the unemployment rate.) Think of the people who moonlight or work as hustlers or drug-dealers.
• if homemakers were included in the labor force. Homemaking is hard work even if it does not command a salary. Including homemakers would increase the size of the labor force and hence lower the unemployment rate.

The actual unemployment rate would be higher:

• if the large number of "discouraged workers" were included among the unemployed.
• if part-time workers who want full-time jobs were counted as partially unemployed.
• if workers who are employed in a job that is substantially below their skill level were counted as partially unemployed.

Who Are the Unemployed?

Table 20-1 shows the unemployment rates for various groups in the United States in 2004. The rate for African-Americans is higher than the rates for whites. That has not always been true: in the 1950s the rate was lower for African-Americans than for European-Americans.

Note the high incidence of unemployment among teenagers aged 16 to 19, especially among black males. That figure is especially worrisome, since young people without a job miss out on work experience, and risk ending up in low-paying, dead-end jobs, or worse. And the figure does not include the large number of young and middle-aged men who are not in the labor force. The rate for females was lower than the rate for males, but the rate for women who maintain families was higher.

Table 20-1. U.S. Unemployment by Demographic Characteristic, 2004

Source: Economic Report of the President, 2005.

Concept Check 1: According to the media, the U.S. unemployment rate last month was 4.9 percent. Is that figure high or low? (Answer at end of chapter.)

There is a lot more to say about the important role of unemployment in the macroeconomy; so far we have said very little about its causes and cures. But before we do, we have to introduce a few related concepts.

Rodney: Wait a minute. Let me see if I've got this straight. In 2005 the unemployment rate was about 5.5 percent. But the unemployment rate for young black males was around 36%.

Ziliak: Right.

Rodney: But the government and the Federal Reserve Bank took the 5.5 percent as evidence of a more or less "full employment." Bernanke believes we're on the surface of the production possibilities frontier, on the verge of inflation. Am I right?

Ziliak: Yes.

Rodney: Call me crazy. But isn't a 36% rate of unemployment-or even an 11.1% rate-another Great Depression? Or worse?

Ziliak: One could easily imagine so.

Rodney: Shall I conclude that macroeconomists and macro policy-makers tend to fixate on national aggregates, not on the distribution by social groups or whatever?

Ziliak: You would not be wrong to conclude as much. As King said in 1967, at the dawn of his Poor People's Campaign, "When you have mass unemployment in the Negro community, it's called a social problem; when you have mass unemployment in the white community, it's called a depression" (M.L. King, Jr., The Autobiography of Martin Luther King, Jr. [Time Warner, 1967 (1998), p. 350], ed. C. Carson).