U.S. Unemployment

The Employment Report put out monthly by the U.S. Bureau of Labor Statistics (BLS) is one of the most-watched indicators of the state of the United States economy, headed by one statistic: the unemployment rate. Not only does the rate of employment – or unemployment – provide a snapshot of the American economy’s strength, but it also delivers a measure of overall satisfaction – or dissatisfaction – with the state of America, its government and its leaders.

Most recently, the unemployment rate fluctuated wildly, from a low of 4.7 percent in 2008 to a peak of 10.1 percent in 2009, after the U.S. housing bubble burst and Wall Street saw collapses unlike those seen since the Great Depression in the 1920s and 1930s.

The consequences of widespread and lingering unemployment are dire – not just for the nation’s overall economy, which loses a significant portion of consumer spending, one of its key drivers of growth, but also for the unemployed individuals, themselves. Long-term unemployment can often be financially, emotionally and psychologically destructive.

A job helps define a person’s place in society, and productive work has long been understood as one of the key elements necessary for a happy life. Persistent unemployment can lead to illness, marital strife, depression and even suicide.

Also, being able to pay one’s bills, provide for one’s family and contribute to society are essential factors in maintaining cultural well-being and communal identity. In addition to the steep decline in home values, America’s recent spate of foreclosures, with its concomitant erosion of robust neighborhoods, has been a direct result of widespread unemployment.

Given the importance of unemployment in U.S. society – not to mention the politically charged arguments for how to keep it low – it is instructive to understand how unemployment is measured, the different causes of unemployment, how the federal government tries to control unemployment and how unemployment rates fluctuated in the recent past.

How Unemployment is Measured

The U.S. government’s monthly Employment Report is based on two surveys. One is the Establishment Report, which asks a random sample of employers how many people are on their payroll. The second is the Current Population Survey (CPS), in which approximately 60,000 households are asked whether their members are working or looking for work.

The responses help the BLS produce an estimate of the number of employed Americans vs. the number of unemployed people. Being unemployed is defined as those who do not have a job, have actively looked for work in the prior four weeks and are available to work. Also listed as unemployed are laid-off workers waiting to be called back to the same job.

The BLS does not include all categories of the unemployed in its official unemployment rate.

In fact, it calculates six separate measures of unemployment, classified as U1 through U6:

• U-1 – Unemployed 15 weeks or longer.
• U-2 – Have completed temporary work or recently lost their jobs.
• U-3 – Official unemployment rate, the total unemployed as a percentage of the civilian labor force.
• U-4 – The total of unemployed (U-3), plus the total of discouraged workers – those who have given up looking for work because they don’t think there are jobs available.
• U-5 – The total of unemployed (U-3), plus discouraged workers (U-4), plus all those “marginally attached” to the labor force – those unemployed who would like to work, but have not looked for work recently.
• U-6 – The total of unemployed (U-3), plus discouraged workers (U-4), plus marginally attached workers (U-5), plus part-time or underemployed workers who want to work full-time but can’t because of economic reasons.

The Causes of Unemployment

Economists, academics and policy makers long have argued about the causes of and remedies for unemployment. While it is unlikely a consensus ever will be reached, given the conflicting political and sociological ideologies in American society, most agree that there are three main categories of unemployment that are readily recognizable. Those are frictional unemployment, structural unemployment and cyclical unemployment.

Frictional Unemployment

Frictional unemployment is always present in the economy. It comes from temporary transitions that workers make when moving from job to job looking for better pay or a job that more precisely matches their skills, or because of a change in locale or family situation. It is also a reflection of new or returning workers into the labor force (e.g., graduating college students or empty nesters rejoining the marketplace).

Frictional unemployment may also be the result of employers refraining from hiring or laying off workers for reasons unrelated to the economy.

Structural Unemployment

Structural unemployment is created when there is a mismatch in the demographic or industrial composition of a local economy. For example, structural unemployment can be high in a place where there are technically advanced jobs available but the workers in that area lack the skills to perform them, or conversely, in a locale where there are workers available but no jobs for them to fill.

Advances in new technologies can cause a decline in older industries, which then must shed workers to stay competitive. One example is the U.S. newspaper industry. Many newspaper reporters, editors and production workers have lost their jobs over the past decade as web-based advertising eclipsed newspapers’ traditional sources of revenue and circulation waned as more consumers got their news from television and the Internet. Laid-off journalists, printers, deliverers, etc., all increased the structural unemployment numbers.

Another example is small family farmers, whose farms cannot match the economic power of wealthy agri-businesses. Scores of farmers left the land and entered the workforce. When they fail to find jobs, they add to the structural unemployment statistics, as do factory workers whose employers have moved operations to low-wage countries.

Cyclical Unemployment

Cyclical unemployment occurs when there is not enough demand for goods and services in the economy at large to provide jobs for everyone who wants one. According to Keynesian economics, it is a natural result of the boom and bust business cycles implicit in the nature of capitalism. When businesses contract during a recessionary cycle, workers are let go and unemployment rises.

When unemployed consumers have less money to spend on goods and services, businesses must contract even further, causing more layoffs and more unemployment. The cycle continues to spiral downward unless and until the situation is improved by outside forces, particularly government intervention of some kind.

How the Government Tries to Lower Unemployment

Whenever unemployment gets too high – usually above 6 percent – the federal government often tries to step in and create jobs. This is especially important if a high rate of unemployment is cyclical, exists across a broad range of industries and segments of the economy and is stubbornly long term (all of which are characteristics of the unemployment brought about by the Great Recession).

The two major tactics the government can employ in its job-creating strategy are changes to its monetary policy and/or changes to its fiscal policies. Different remedies have been applied at different times in our history with different results – and politics always plays a role in whether or when a particular tactic is going to be introduced.

Monetary Policy

Monetary policy is controlled by the Federal Reserve Bank of the United States, the independent central bank empowered to control the country’s money supply. To stimulate the economy into creating more jobs, the Fed often offers help in one of two ways.

One tool is lowering the interest rates in the overall economy so that it is cheaper for banks and businesses to borrow money. The goal is to encourage banks to invest and businesses to expand, stimulating economic vitality and thus bringing about increased hiring. Lower interest rates also decrease individual borrowing costs, inducing consumers to spend more money.

The second Fed tool is increasing the amount and/or the availability of money in circulation by buying and selling various financial instruments (treasury bills, bonds, etc.). As more money enters the economy, commerce expands and businesses can hire more workers.

Fiscal Policy

If the Fed’s expansionary monetary policy is not adequate to reverse the economy’s downward trend, then the federal government will employ various fiscal policies in order to combat continuing high levels of unemployment.

Some things the government can do:

• Cut taxes for businesses and individuals to increase spending and stimulate economic growth.
• Increase government spending in targeted industries in order to spur employment.
• Hire workers to build things like mass transit systems or provide services like infrastructure upkeep and repair.
• Provide benefits to unemployed workers so they can spend on basics like food, clothing and housing, driving retailers and manufacturers to hire more people.

History of U.S. Unemployment

The U.S. government began tracking unemployment officially in the 1950s, but estimates of previous unemployment rates are not difficult to ascertain. The Great Depression of the early 1930s had an unemployment rate of 23.6 percent – the highest in modern times. The country’s lowest rate – 1.2 percent – came in 1944 when millions of men were in uniform and the wartime (World War II) economy was in overdrive. The lowest post-war rate was 2.9 percent in 1953.

Since 1948, the end of the postwar period, the United States has experienced 11 recessions. Over that span, the federal government has employed various methods to push back unemployment caused by these cyclical contractions of the economy.

For example:

• The Federal Aid Highway Act, which authorized the construction of the Interstate Highway System, putting thousands to work, helped President Dwight Eisenhower combat the recession of 1957 and its unemployment rate of 6.8 percent.
• President John F. Kennedy cut taxes and expanded Social Security and unemployment benefits to counter a brief recession at the beginning of his term. The rate went from 6.7 percent in 1961 to 5.5 percent in 1962.

The unemployment rate reached a peak of 10.8 percent in the early 1980s, falling to 5.3 percent by the end of President Ronald Reagan’s second term.  It rose to 7.5 percent in 1992, under George H.W. Bush, and hovered between 4 and 6 percent during the Bill Clinton and George W. Bush presidencies. The Great Recession pushed it above 10 percent for the second time in decades. It stayed above 8 percent until September 2012.

In 2011, President Barack Obama’s administration proposed the American Jobs Act, but it has not been passed by Congress. Some economists believe that had it been enacted, it could have pushed the unemployment rate below 7 percent. As always, when it comes to American fiscal policy, there is no agreement on which plan is best.