WHY IS THE ABILITY TO MEASURE THE AMOUNT OF UNEMPLOYMENT SO IMPORTANT?
The unemployment level is a key indicator of economic activity. High unemployment levels usually signal an economy that at best is stagnating or experiencing a reduction in economic growth at its worst. It represents the waste of a valuable resource with the effect of a huge wave crashing through a vulnerable society leaving economic and emotional destruction in its wake. It may adversely affect everything from consumers’ purchasing habits, new technology, and business growth to crime rates, public services, emotional depression, and an overall skepticism concerning society’s leadership, both in business and government.
The years 2008 and 2009 in the U.S. will be especially memorable because of the skyrocketing unemployment rates caused in part by financial meltdowns in the real estate and stock markets. The percent of people unemployed in the U.S. workforce as of July 2009 was 9.4% (compare that to 5.5% in 2004). To put this in perspective, there was an average of 645,000 workers laid off PER MONTH from November of ’08 through April of ’09. The effects of these massive layoffs will be felt for years to come.
WHAT CAUSES HIGH UNEMPLOYMENT?
Answers to this may vary, but a high unemployment rate over a long period of time (six months to a year) is usually caused by a decrease in a society’s output of goods and services. Here’s where you get kind of a snowball effect often associated with economic fluctuations discussed at the end of Chapter 14.
· When there is an initial decrease in consumer demand, the manufacturer will produce less which means he/she will need fewer workers.
· After laying off several workers throughout the economy, there is now even less money in the hands of the consumers (more people without jobs, less income to spend) who will demand even less than before
· causing the manufacturer to again lay off more workers because of another reduction in productivity.
You see how this ‘snowball’ effect keeps going until the manufacturers go out of business and the country finds itself in a deep economic recession. The charts below help illustrate the interrelationship between unemployment, real GDP, and investment spending.
As you look at these charts, start from the bottom chart (Real GDP). I’ve drawn dotted lines through specific time periods of recession (specifically 1970-71, 1974-75, 1980, 1982, 1991, 2001-2002). Notice as you move upward the interrelationship between ‘real’ GDP and investment spending (spending by private businesses, corporations, and banks). Both curves follow the same pattern. As investment declines so do growth (investment).
Notice the almost inverse (opposite) relationship between unemployment and both GDP and investment spending.
This point is also made by the author of your text on pg. 414, Figure 15.5 which I’ve reproduced for you below:
As investment spending decreases, forcing a decrease in ‘real’ GDP (the ‘output’ gap), unemployment rates begin to rise. Note in the above figure that for every dip in productivity (output gap) there is also an almost equal corresponding increase in unemployment. The output gap referred to in the above figure is the difference between real GDP and Potential GDP.
Put another way, it’s the difference between an economy’s output at full employment (Potential GDP) minus real GDP. Obviously, when less is produced, less labor is required, which means less income, which means a shift in the demand curve downward and to the left (intersecting the supply curve at a lower price for a lesser quantity) which means more layoffs and…well, you get the picture.
NOTE: Be sure to read the article accompanying the lecture it illustrates most of the points discussed in this module in real life situations.
Another example I can give here is an article published in The San Diego Union-Tribune by Dean Calbreath (Recession Sting a Lasting Ache for Job Market. San Diego Union-Tribune. 9/7/2009) concerning the state of the U.S. labor economy as of August 2009.
Notice the two charts. Unemployment in a year and a half has jumped from just above 4% to almost 10%. Also, notice the length of this recession – at 20 months and counting. In the chart below the line chart notice that the cumulative loss of jobs has jumped from zero in 2007 to 6.8 million as of August 2009. Read the entire article, and you’ll get a real- world idea of what I’ve discussed in this module