Cyclical, Frictional and Structural Unemployment - Statistics Project Example

Economic analyses of the US unemployment problem and a Macroeconomic-based solution to the problem. The U.S. Bureau of Labor Statistics releases data every month giving a comprehensive report on the employment rate and unemployment situation of the U.S. economy. The report classifies the data by age, sex, race, and a number of other characteristics. In the U.S, People are considered as unemployed if they have lost their job, have left their previous job voluntarily and are actively looking for another job; have recently entered the labor force or have reentered the labor force and are looking for work. 50 percent, 10 percent, 30 percent and 10 percent of the total U.S unemployment accounts for unemployed persons due to layoff, those who have already quitted their previous jobs, those reentering the labor force and new entrants to the labor force respectively. According to the bureau of labor statistics, the number of unemployed persons in U.S stood at 11.7 million while the unemployment rate stood at 7.6 percent in March 2013. This was a decrease from 7.7 percent in the previous month. In march 2013, the unemployment rate for adult males was 6.9 percent, adult females 7.0 percent and youths 24.2 percent. Categorized according to race, the unemployment rate for whites was 6.7 percent, blacks 13.3 percent, Hispanics 9.2 percent and Asians 5.0 percent. In the same month, the number of persons unemployed for 27 or more weeks, stood at 4.6 million accounting for 39.6 percent of the unemployed. The labor force participation rate reduced by 0.2 percent while the civilian labor force reduced by 496,000. The involuntary part-time workers dropped by 350,000 to 7.6 million in march. They are regarded as involuntary part time workers because their hours had been cut back or because they were unable to find a full-time job. In the same month, employment in the retail sector declined by 24,000 while employment in the health sector, professional and business services increased by 23,000 and 51,000 jobs respectively. The construction industry added 169,000 jobs. Job decline in clothing and accessories stores stood at 15,000, building material and garden supply stores at 10,000 and electronics and appliance stores 6,000. Some sectors in the government such as Postal Service employment fell by 12,000. Compared to previous months, major industries such as mining, manufacturing, wholesale trade, transportation and warehousing, information, financial activities, state government, and local government recorded dismal changes in employment. Since 1948, to 2013, the average unemployment rate has been 5.81 percent. The highest unemployment rate was in 1982 hitting a high of 10.8 and the lowest ever was in 1953 hitting a low of 2.50 percent. Unemployment is defined as the fraction of the total people looking for a job to the total labor force. Since the great depression, U.S has recorded the highest stretch of unemployment rate of above 8 percent. The congressional budget office projects that the unemployment rate will remain above 8 percent until 2014. The unemployment rate is a good indicator of how the economy is performing. High employment rates show that the economy is having a low GDP and therefore the economy is performing poorly. High unemployment rate leads to a general decline in consumption. Having the right unemployment rate figures enables policy makers to craft necessary policies to counter unemployment. The federal govern uses the unemployment figures to come up with a budget that is geared towards expanded Gross National Product. The bureau of labor statistics when collecting and compiling unemployment data, exclude those persons who would like to work but have not searched for employment in the past four weeks. Also, part time workers who would prefer full time work are excluded. If this person were to be included among the unemployed data, then the unemployment rate would be higher than previously reported. For instance the unemployment rate in January 2012 would be 15 percent above the reported 7.9 percent. Another instance has like the share of unemployed people looking for work for more than six months reached 40 percent in December 2009 yet that figure was not included in the reported unemployment rate. This means that the reported unemployment rate by the U.S government can be misleading. Low demand for goods and services, mismatch between employers’ needs and the skills or location of the unemployed, Incentives for people to stay in the labor force and continue looking for work from unemployment insurance and erosion of unemployed workers’ skills are among the causes of unemployment. There are different types of unemployment. Cyclical unemployment refers to persons unemployed due to reduced demand for goods and services while frictional and structural unemployment refers to the natural rate of unemployment. There are several monetary and fiscal policies that can be put in place to reduce the unemployment rate. The federal reserve act states that monetary policies are supposed to promote maximum employment and stabilizing prices. Fiscal policies on the other hand, involves use of government spending and varying taxes to stimulate economic growth. Both fiscal and monetary policies are aimed at boosting the economy and demand for goods and services. This is due to the fact that the increase in unemployment is due to low demand for labor which in turn results in weak aggregate demand . For the federal government to increase aggregate demand and supply in order to reduce unemployment, it needs to boost household disposable income by reducing income tax. Consequently, the consumers will spend the additional income in purchasing goods and services. The aggregate demand and aggregate supply curve below shows that an increase in demand means more workers are needed. The aggregate demand will shift from AD1 to AD2. Businesses will in turn employ more people so that they can cope with the increasing demand. As a result aggregate supply curve will shift from AS2 to AS1. This will result in a new equilibrium point in the market. The federal government can provide support to businesses by coming up with initiatives that would reduce the marginal cost to businesses. The reduced cost will translate increased business expansion. As a result more people will be employed. Increased aid to state governments and increase government spending on infrastructure will create job opportunities and also encourage more investments in other areas. Although policies designed to significantly reduce unemployment can be costly to the federal government, they would be very effective. Other policies such as changing the unemployment insurance system to achieve higher efficiency, training workers, helping the unemployed transition to new jobs would substantially reduce the unemployment rate for over three years as they have limited scope, but can provide support to certain groups and have long-run positive effects. Policies affecting businesses’ cash flow would have little impact on their marginal incentives to hire or invest resulting small effects on employment per dollar of budgetary cost. An increase in the demand for labor as government spending generates growth. All these policies will lead to reduced unemployment, competition among firms for fewer workers hence increased nominal wages and increased workers bargaining power for increased wages and improved working conditions. Despite the economic benefits of reducing the level of unemployment by increasing government spending and lowering income tax, actions taken to reduce unemployment would not only increase budget deficit but also lead to increased Wage costs and increased prices as firms pass the increased cost to consumers. The level of inflation will rise. The Phillips curve below shows that an increase in government spending will shift aggregate demand from AD to AD1. This will lead to an increase in income to Y1 and a reduction in unemployment. However, households will predict an increase in inflation and consequently increase their bargaining for increased wages. As a result, wage costs rise and the aggregate supply curve shifts up to AS1.The the economy moves to Y, though with an increased price level P2. The recovery of the U.S economy from the 2008 – 2009 recessions is shown by the increase in job creation. 243,000 jobs were created in January 2012. The construction and manufacturing sector observed the highest growth in employment. Although the use of both fiscal and monetary policies would substantially reduce the unemployment rate, the unintended consequences in the form of increased budget deficits would hurt the economy. The federal government would go for increased borrowing to fund its budget. Reduced income taxes on household and increased government spending on infrastructure are among the fiscal and monetary policies which would play a big role in reducing unemployment. The analysis uses authentic data from the U.S bureau of labor statistics to come up with a credible write up. The data from recent surveys done by the bureau of the census is categorized into various parameters. Using the proposed policies in this paper, the government can significantly reduce unemployment; increase the citizen’s disposable income by reducing income tax hence increasing utility satisfaction. Through increasing federal government spending on infrastructure, many jobs will be created at the same time general infrastructure will improve. Work cited Lutes, John. Balance of payment and economic growth: New York: Herper and Brothers, 1959. Print Richard, Sexton. Exploring Economics. Jefferson: McFarland, 2004. Figure 1: Aggregate demand and aggregate supply curve. Figure 2: Phillips curve Source: www.economicsonline.co.uk Read More