Unemployment

UNEMPLOYMENT IS A situation in which there are a greater number of people willing to work for a prevailing wage than there are jobs being offered. As such, unemployment can be economically described as a surplus in the labor market. The size of unemployment is measured by unemployment rate, which is a ratio of total unemployment to the total labor force, where the latter is the sum of employed and unemployed. We typically count an individual who is 16 years of age or older, is not institutionalized (at school, in military service, retired), did not work a for particular period specified in national legislation (for example, one week), and seeks a new job as unemployed.

Since long-term mass unemployment had not existed prior to the Great Depression, economists treated the surplus in the labor market as one particular application of the general economic phenomenon—surplus of quantity supplied over quantity demanded. Only in the second half of the 20th century did unemployment policies, policies specifically designed to fight unemployment, reach the status of a major political and public concern, as the impossibility to find a job is indeed a reason for economic hardship among the masses of people.

Unemployment rates in some industrialized countries of Europe are in the double digits, and some groups—youth, minorities, school dropouts—are hit severely, with unemployment rates within their groups reaching over 20 percent or more. This political and emotional aspect of the problem, however, does not change anything in the economic nature of the issue. Somebody is willing to work for an existing wage and there is no job available.

The surplus of labor exists because, for the existing supply of and demand for labor, the wage is too high. A crucial part of the problem is that some firms simply cannot afford to pay such a high wage and hence do not demand new employees. If the wage dropped, new jobs would become profitable for firms and the unemployment would disappear. Hence the most obvious recipe for elimination of unemployment is the decrease of the wage.

In today's reality, this solution may be quite difficult (labor unions and minimum wages are often mentioned as examples of these obstacles), and thus the most obvious and historically most widely used solution to unemployment cannot often be used today. In the past, though, wages always declined during the time [Page 1090]of high unemployment and economic crisis, which enabled firms to cut the cost, overcome economic problems, and create new jobs.

The Great Depression was the first major crisis in which wages in real terms increased as a deliberate objective of public policy that demonstrated a new situation in the labor market—the old remedies became impossible to be used anymore.