Introduction
Unemployment is a serious problem in the modern world since it has social and economic consequences for individuals and the country. Crises and disruptions in the state’s economy can lead to the fact that it will no longer be able to create a sufficient number of jobs for citizens. Situations where the country’s labor force participation rate does not match the number of jobs, lead to economic decline and crises. Therefore, this paper will analyze the relationship between the state of the economy and the unemployment rate in a country.
Discussion
For each country, it is possible to determine its labor force participation rate. This indicator is the percentage of the population aged 16 and over working or actively looking for work (U.S. Bureau of Labor Statistics, n.d.). This rate shows how many labor resources a country has, which is important for producing goods and services and, consequently, maintaining its economy. For example, in 2008, the labor force participation rate in America was 66% (U.S. Bureau of Labor Statistics, n.d.). However, this rate gradually decreases, which may decrease the country’s economic potential. According to the U.S. Bureau of Labor Statistics (BLS), in 2022, the labor force participation rate was 62.3%. In addition, not all working-age people may have sufficient skills and qualifications to get a job. As a result, the unemployment rate is rising, leading to slow wage growth and potentially threatening inflation (Mankiw, 2019). Moreover, a country cannot always create sufficient jobs necessary to realize its labor potential.
A decrease in the labor force participation rate leads to an increase in unemployment. The unemployment rate is measured by dividing the total unemployed by the total labor force (U.S. Bureau of Labor Statistics, n.d.). U.S. Bureau of Labor Statistics regularly analyzes the labor market, identifying key indicators and providing an annual report on the employment situation. Therefore, the lower the percentage of non-disabled citizens looking for work, the higher the unemployment rate in the country can be. Moreover, the decline in the labor force participation rate demonstrates a decrease in the working potential of the country due to a decrease in the number of citizens who can work (Mankiw, 2019). At the same time, the unemployment rate decreases when non-disabled citizens find work. In this case, the number of unemployed people decreases while the level of the labor force remains unchanged. Moreover, this indicator may also decrease due to an increase in the percentage of the country’s labor force (Mankiw, 2019). For example, this can happen when new jobs are created for a population not previously interested in finding a job and employment.
In addition, a decrease in the labor force participation rate may indicate a deterioration in the labor market since the population is not interested in employment due to external circumstances. People who were previously interested in employment but did not actively seek work in the four weeks before the BLS survey are discouraged workers (Mankiw, 2019). These people are not included in the unemployment rate calculation because they are no longer considered a potential labor force. Therefore, excluding discouraged workers from the statistics lowers the unemployment rate, reported in the media. Although discouraged workers are not included in the calculation of the official unemployment rate, they are included in the alternative “measures of labor underutilization” (Mankiw, 2019, p. 573). These indicators are important in the analysis of the economic state of the country. A massive increase in the number of discouraged workers could lead to an absolute reduction in unemployment in the country. However, this situation indicates the country’s economic decline and the labor market’s weakness.
The number of discouraged workers has increased due to the Covid-19 pandemic. According to the BLS, in 2008, 381,000 people lost interest in finding a job (U.S. Bureau of Labor Statistics, n.d.). In contrast, in 2022, this figure was 410 thousand people, which is still less than 458 thousand discouraged workers in 2021 (U.S. Bureau of Labor Statistics, n.d.). The increase in the number of citizens who are not interested in employment most often indicates a mismatch between citizens’ labor qualifications and skills and the jobs the government can create.
Another indicator that affects the unemployment rate in the short term is frictional unemployment. It arises from workers looking for a new job that will better suit their skills and qualifications and meet their wage needs (Mankiw, 2019). Frictional unemployment indicates that the country’s economy is developing and new job opportunities are being created. In such conditions, non-disabled citizens can change jobs in search of better conditions. Moreover, Mankiw (2019) argues that frictional unemployment is inevitable in some cases as the economy is constantly changing. Consequently, new jobs that may interest non-disabled people are constantly being formed based on consumer behavior or the development of international economic relations.
While frictional unemployment is short-term and indicates positive trends in the country’s economy, structural unemployment is a predominantly negative phenomenon. It is a situation where “the number of jobs available in some labor markets is insufficient to provide a job for everyone who wants one” (Mankiw, 2019, p. 575). This type of unemployment is the most prevalent in today’s economy. The main negative consequence of this type of unemployment is that, due to its duration, it negatively affects the overall level of unemployment in the country. Moreover, structural unemployment can result from technological and economic developments, resulting in increased competition in the labor market.
Another type of unemployment is the cyclical one that arises due to the cyclical development of the state economy, which is characterized by ups and downs (Mankiw, 2019). With the country’s economic state declining, companies cannot create a high demand for specialists and create new jobs. Consequently, several employees apply for one job at once, which the organization cannot employ due to a lack of resources. Moreover, in a deteriorating economy, companies are forced to lay off some workers they perceive as the least profitable, resulting in rising unemployment. The main task of the state in regulating cyclical unemployment is to stabilize the country’s economy to avoid sharp increases and decreases in jobs. The authorities can reduce unemployment through policies and various programs. First, the government supports the unemployed in obtaining the qualifications necessary for employment in available jobs. Secondly, the state offers financial support to people who move from regions with high unemployment. In addition, it is possible to reduce or shorten the duration of unemployment insurance in order to motivate citizens to search for work actively.
Unemployment insurance is provided for the unemployed, designed to protect their income in the event of a job loss. On the one hand, such protection of citizens by the state is a positive phenomenon that guarantees economic protection for citizens. However, this program results in “the unemployed devote less effort to job search and are more likely to turn down unattractive job offers” (Mankiw, 2019, p. 577). Since unemployment insurance payments stop as soon as a person finds a job, many are in no hurry to look for work, counting on government assistance. In addition, this insurance creates frictional unemployment as citizens can afford to spend more time looking for a new job (Mankiw, 2019). Therefore, the duration of obtaining unemployment insurance should be limited, for example, to 8 weeks. The Bureau of Labor Statistics considers the labor force participation rate only for citizens actively looking for work over the past four weeks. Unemployment insurance benefits normally last for 26 weeks (Mankiw, 2019). Limiting the duration of payments will reduce government spending on maintaining the income of the unemployed population.
Another factor affecting the country’s economy and unemployment is unions. On the one hand, they help “firms respond efficiently to workers’ concerns” by helping raise wages for employees and improving working conditions (Mankiw, 2019, p. 582). However, their harm to the country’s economy is much greater than it might seem. Unions can harm the economy by raising the unemployment rate. In most cases, wage increases for members of unions come at the expense of a reduction in the number of jobs. As a result, the company becomes more attractive to new employees but often has limited opportunities to create new jobs. That creates structural unemployment, which negatively affects the overall unemployment rate in the state.
Summary
- The country’s labor force participation rate and unemployment rate are interdependent indicators since the lower the unemployment rate and the higher the percentage of the labor force, the lower the percentage of unemployed people.
- Although an increase in the number of discouraged workers may reduce the unemployment rate, this is a negative phenomenon that indicates the deterioration of the country’s economy.
- Structural unemployment is the most common in today’s economy.
- Structural unemployment due to a mismatch between the number of jobs and people willing to work is the most common in today’s economy.
- Unemployment insurance can increase the unemployment rate as people are less interested in finding a job.
- Unions often harm the economy and unemployment because they only protect the interests of their members.
References
Mankiw, G.N. (2019). Principles of economics. Cengage.
U.S. Bureau of Labor Statistics (n.d.). Web.