Unemployment and Underemployment

Abstract

Unemployment comes in several forms and affects millions of people at any given time. People can find themselves out of a job because the economy is in a downturn. Or they could be in the unenviable position of working in a dying industry. The luckier ones are simply transitioning from one job to another by choice. For most people, though, unemployment is a stressful personal experience. And though economists agree that steps should be taken to keep unemployment low for the well-being of the economy as a whole, they disagree on how best to do this.

Keywords Aggregate Demand; Aggregate Supply; Coping; Demand-Deficient Unemployment; Equilibrium; Frictional Unemployment; Full Employment; Involuntary Unemployment; Keynesian Economics; Monetarism; Non-Accelerating Inflation Rate of Unemployment (NAIRU); Phillips Curve; Structural Unemployment; Underemployment; Utility-Maximizing Behavior

Work & the Economy > Unemployment & Underemployment

Overview

Demand-deficient, Structural & Frictional Unemployment

Very few of us can afford to be unemployed for very long. The unpaid bills keep mounting; the depression, stress, and social isolation grow ever more wearing. The economy as a whole cannot remain stable if large numbers of jobless workers are unable to purchase the consumer goods and services that account for two-thirds of US economic output. Unsold inventories pile up, profit-driven businesses cut back on production, and more people lose their jobs or find themselves with reduced hours. Economists call this chain of events demand-deficient unemployment, and, because its roots lie in the natural expansion and contraction of the business cycle, it is expected to happen periodically. Sometimes, though, it is precipitated by a major economic shock, such as a credit crunch or sudden steep rise in oil prices. Then, the downturns are more severe, and the accompanying unemployment more extensive and drawn out.

As bad as this can get, it is not nearly as pernicious as what is known as structural unemployment. Here, goods and services simply fall out of favor and are replaced by product substitutes; or, thanks to automation, they are made faster and cheaper by fewer workers. Whole industries disappear, are utterly transformed, or else moved offshore never to return. The prospects for those summarily cast aside are far from promising. Unless they have skills other industries need or are willing to retrain, these displaced workers will earn a fraction of what they once did. The lucky ones will be hired full time as unskilled labor; the rest will collect government benefits and will perhaps supplement these with off-the-books work or else join the ranks of the underemployed who make ends meet working only part time.

Even in the best of times, the economy never quite attains the full employment to which it aspires. In theory, every available worker should hold a permanent, well-paying job suited to his or her capabilities and skills level. Subject to millions upon millions of individual decisions each day, however, the real-world economy is actually too dynamic for this to happen. There is always somebody between jobs: young adults entering the workforce for the first time, experienced workers re-entering it after retraining or raising a family, and those eager to secure a better position. Information about job openings must be ferreted out, application forms filled in and processed, interviews conducted—all of which takes time. So, even in economic boom times, there is going to be some amount of what economists call frictional unemployment.

Underemployment

There will likely also be what economists refer to as underemployment. Here it is not a question of not having a job, but rather of having a job for which one is overqualified or underpaid. The US Bureau of Labor Statistics estimated that 9.9 percent of the workforce in the United States fell into its "U-6" category—which measures the "total unemployed, plus all persons marginally attached to the labor force, plus total employed part time for economic reasons, as a percent of the civilian labor force plus all persons marginally attached to the labor force"—in December 2015 (Bureau of Labor Statistics, 2016). If a person is unemployed and has given up on looking for a job for the past four weeks, performs a minimum of one hour of work in a week and is paid twenty dollars or more, or works part time but wants full-time work, the US Department of Labor does not count him or her in its unemployment rate (Clifton, 2015). For recent college graduates, the underemployment rate was 34 percent in 2001 but rose sharply after the 2001 and 2007–9 recessions; in 2012, approximately 44 percent of recent college grads were underemployed (Abel, Deitz, and Su, 2014).

Unemployment is not nearly as straightforward as the monthly jobless rate reported by the government might suggest. As a telling economic indicator, it only counts those out of work actively seeking employment; it excludes those who have given up looking altogether or who are underemployed. Still, the official number covers the job losses amongst the nation's more productive workers, the ones who earned and presumably spent the most in wages. This involuntary unemployment is thus the most problematic. With the onset of the 2007–9 recession, unemployment rates in the United States skyrocketed, going from 5 percent at the beginning of 2008 to its peak at 10 percent in October 2009. The unemployment rate remained high throughout 2010 and began to decline slightly in late 2011, finally reaching pre-recession levels (5.6 percent) in December 2014. However, counting underemployed and discouraged workers, the actual unemployment rate has been estimated to be nearly double the official statistic.

Nor is unemployment an equally shared burden. How much rates vary by age, gender, race, and educational attainment is clearly documented in data gathered by the Bureau of Labor Statistics. In December 2015, for example, the seasonally adjusted unemployment rate for twenty- to twenty-four-year-olds was 9.4 percent, more than twice the rate of 4.3 percent for twenty-five- to fifty-four-year-olds. An even lower rate of 3.5 percent was reported among workers fifty-five and over. The aggregate unemployment rate was 5 percent in December 2015. At 5.2 percent, the unemployment rate for men overall was higher than the roughly 4.8 percent rate for women overall.

Rates varied even more by race. Among whites, the rate ran to 4.1 percent in 2015; among African Americans it ran to 8.8 percent, over twice as high. At up to 6.2 percent, the rate for Hispanics or Latinos, meanwhile, fell in between. Education-wise, up to 6.7 percent of high school dropouts seeking work were unemployed as opposed to 5.6 percent of high school graduates with no college degree. A rate of as high as 4.1 percent among individuals with some college education or an associate degree suggests they had an easier time finding work, though not as easy a time as college graduates with a bachelor's degree or higher, whose rate of unemployment ran to only 2.5 percent (Bureau of Labor Statistics, 2016).

Further Insights

In all, anywhere between 20.2 percent and 30.1 percent of the US labor force between 1972 and 1992 had firsthand experience of underemployment or unemployment, a set of aggregate numbers so high as to raise a disturbing question: why can't society do more to bring about "full employment"? Perhaps this a question better left to economics, not sociology. However, although the more germane discipline from a technical standpoint, economics has as its focal point the efficient allocation of resources. Unemployment in this respect is just one of several by-products of this constant process of adjustment about which economists theorize. Its impact on individuals, communities, and society in general matter less than its impact on markets. The so-called immutable laws of economics are no more than conceptual models of imponderably complex real-world events we choose to believe in. As a socially mediated set of mental constructs, economic theory is amenable to sociological analysis.

Keynesianism: The Macroeconomics of Unemployment

The economic theory explaining unemployment did not really come into its own until the twentieth century, upon the publication of John Maynard Keynes's The General Theory of Employment, Interest and Money in 1936. Keynes broadened the scope of orthodox economic analysis by framing the problem of production and employment in the larger context of national economies. Myopically examining the behavior of households, firms, and markets in isolation, he argued, ignored the much greater influence exerted by aggregate supply and aggregate demand. Of the two, he argued, aggregate demand was the more crucial. If supply did create demand as was widely supposed, no one would be jobless when, in fact, many were at the time.

In Keynesian economics, aggregate supply is the sum of all the goods and services businesses bring to the marketplace with the expectation that the proceeds will more than justify hiring the required labor. Aggregate demand, conversely, is the level of output of goods and services consumers purchase with the wages earned producing them. Aggregate demand matters more, since we typically must first earn (or borrow) the money to purchase what businesses sell. It is not only a question of how much we earn today but tomorrow as well. If consumers and businesses expect harder economic times ahead, Keynes warned, they take the precaution of cutting back spending. The mere prospect of an economic downturn, higher inflation or rising unemployment, in other words, can turn our worst fears into a reality (Edwards, 1959).

Economically speaking, labor is just another commodity; that is, something bought and sold in an open, competitive marketplace. Like any market, the demand for and supply of labor is either in equilibrium or disequilibrium. The former "market-clearing" state exists when supply exactly equals demand, the latter whenever supply and demand fall out of kilter. Importantly, whenever external circumstances permit, internal forces impel a market in disequilibrium toward equilibrium. Technically, whenever the equilibrium point falls short of the full-employment mark, a certain amount of what Keynes called "involuntary" unemployment is inevitable. Even Keynesianism's arch critic, the monetarist Milton Friedman, believed there was a "natural rate" of unemployment (Hall, 1995).

The question facing Keynes, Friedman, and today's economists is perplexingly simple: What, if anything, can be done to keep the real rate of unemployment at or near its "natural" rate? Examining ninety-six years of data ending in 1957, economist A. E. Phillips hypothesized the existence of an inverse relationship between changes in the wage and unemployment rates captured graphically by a downward sloping, inwardly shaped curve that to this day is known as the Phillips curve. When the inflation rate quickened, the unemployment rate dropped; when the inflation rate slowed, the unemployment rate rose.

Keynesian economics holds that in the short run, a higher level of inflation is preferable to an unacceptably high rate of unemployment. Central banks should thus expand the amount of money in circulation, and governments should increase their spending to increase output. This would in turn put money back into workers' pockets; they can then spend, stimulating further economic growth. Monetarism rejects this prescription on the grounds that markets behave more or less autonomously and will eventually return to equilibrium. In the interim, prices must be allowed to rise or fall freely even at the expense of higher unemployment in the short term. Both courses of action, however, discounted the possibility of simultaneously high inflation and high unemployment.

Stagflation

"Stagflation," as it was called, confounded Keynesians and monetarists alike, because neither theory satisfactorily explained it. In all fairness, neither school had occasion to until the price of oil rose four-fold in 1973. The United States at the time was ill-prepared to absorb such a sharp cost increase in so basic a commodity. Inflation was already on the rise thanks to a "guns-and-butter" fiscal policy, the economy close to full production. Costs skyrocketed and attempts to pass along the increases to consumers triggered double-digit inflation. With earnings plummeting, businesses had no choice but to lay off workers.

Still, no one thought a state of high unemployment and high inflation could last for very long. They were wrong; by 1980, the inflation rate was 20 percent, the unemployment rate above 7.5 percent. Central banks finally intervened and raised interest rates sharply; the economy contracted as expected and inflation slowed dramatically. But these monetarist-inspired countermeasures led to such a severe recession that they were soon abandoned. Since then, central banks' chief concern has been keeping inflation in check. Whenever it starts to rise above a natural rate of 2 to 3 percent, central banks incrementally raise interest rates to prevent the economy from overheating.

Interestingly, rather than use stagflation to discredit the Phillips curve much favored by Keynesians, monetarists fine-tuned the model, adding expectations of future inflation to the analytic mix in an attempt to explain stagflation. To do so, however, they first had to posit the existence of a non-accelerating inflation rate of unemployment, or NAIRU. Actually a much simpler concept than its name suggests, NAIRU is the lowest rate of unemployment possible while maintaining acceptably low inflation rates. As the economy moves toward full employment, and the supply of surplus labor dwindles, in effect, the point will come when the addition of one more hire will trigger accelerated inflation. In its current incarnation, the Phillips curve is not one but two curves—one short term, the other long term. The first charts the inflation-unemployment trade-off, the Phillips curve of old. In the second, the unemployment rate achieved leveraging this trade-off falls below NAIRU, triggering higher inflation (Parkin, 1998).

The Individual's Experience of Unemployment

Much more is lost than a steady paycheck when one becomes unemployed. Work, after all, is a social experience; it defines us in important ways and gives our day-to-day lives context. A regular job structures large blocks of time for us, while the workplace gives us an opportunity to engage others socially free from the pressures of family life. The work itself focuses our minds, furnishes us a sense of purpose and accomplishment and the social status that goes with it.

There are exceptions, of course. Some may welcome their first few days of unemployment. Inevitably, though, they succumb to the stress brought on by shrinking finances and the stigma felt by no longer contributing to the workforce. Then, there's the sheer uncertainty of it all: Where will I find work? How much longer before I find a job? Who will lend me the money to pay next month's rent? Fourteen of sixteen major longitudinal research studies found higher levels of psychological distress among the unemployed than the employed (Murphy & Athanasou, 1999).

Anxiety, depression, and low self-esteem were among the symptoms experienced more intensely among unemployed subjects. Aimlessness, boredom, and loneliness were also more of a problem than for those who still had access to a workplace social network. The emotional support, practical help, information, referrals, and sense of belonging can be sorely missed. Otherwise, why else would research show unemployed workers who have access to alternative social networks tend to cope better than those who don't? Or why those with "satisfying" personal relationships reportedly cope the best?

Continually adjusting the way we think and act when confronted with day-to-day demands and stressors confronting us to realize some longer-term goal is utility-maximizing behavior of a high order. A supportive social milieu is helpful in this respect. Even at the best of times, being the target of socially mediated value judgments and prejudices is a trying experience. At the worst of times, it can be devastating for anyone already struggling with low self-esteem. Anyone unemployed for any length of time already wonders if strangers and casual acquaintances think it's their fault, that they're a bad worker, lazy, immature, etc. Even among one's friends and relatives, encouragement and ambivalence sometimes go hand in hand, and frustration with the problems the predicament creates for them occasionally flairs up as scornful rebuke (Creed & Moore, 1996).

Viewpoints

Markets

Almost everyone fears being unemployed, not only for the hardship and uncertainty it brings, but for its stark reminder that we are largely powerless in the face of impersonal forces of vast proportion. Markets, paradoxically, are social structures where individuals, organized groups, and institutions freely interact with each other out for mutual gain, a kind of collective behavior on a grand scale. Persistent unemployment implies that, in practice, the gains are not mutual and the markets not always efficient. If they truly were, demand-deficient and structural unemployment, much less underemployment, would not be the problem they clearly are. Yet, frictional unemployment points to a countervailing dynamism, the hallmark of an efficient market. Economists fear the former, praise the latter, concede that full employment is at best highly unlikely, and disagree on how best to control it.

As a discipline, economics is both descriptive and prescriptive. We study economics in order to maximize wealth then shape our norms and values and organize our social and political life around what we discover. Any unemployment above the so-called natural rate forces us to ask ourselves some rather uncomfortable questions. How much of what economists tell us, for example, is ideologically based; how much verifiability true? More important, can unwanted unemployment be eliminated, or is it an intractable given of economic life?

There have been times during very low unemployment when businesses have to raise wages to attract needed workers. They typically pass the increase along to customers in the form of higher prices, triggering rising inflation. The economy is said to be "overheating"; central banks raise interest rates to "cool" it off. Higher borrowing costs dampen business investment and consumer spending, forcing firms to lay off recently hired workers. Demand-deficient unemployment will thus be with us as long as there's a business cycle; and structural unemployment will be with us as long as new technologies come to make current ones obsolete.

Sociologists thus have ample reason to deepen their understanding of the personal impact unemployment has. Economists and politicians may wrangle with the problem; the jobless and underemployed bear its full brunt.

Terms and Concepts

Aggregate Demand: The level of output of goods and services consumers purchase with the wages earned producing them.

Aggregate Supply: The sum of all goods and services businesses bring to the marketplace.

Coping: Constantly changing cognitive and behavioral efforts to manage specific external and internal demands.

Demand-Deficient Unemployment: Joblessness directly attributable to economic slowdowns.

Equilibrium: When demand exactly equals supply.

Frictional Unemployment: A type of unemployment temporary in nature where workers are searching for a new job, undergoing training, etc.

Full Employment: The point in a national economy when every available worker, both skilled and unskilled, earns a steady wage from the most productive work they're capable of doing. What residual unemployment that does exist is entirely frictional in nature.

Involuntary Unemployment: In Keynesian economics, the gap between the number of people working when the labor market is in equilibrium and the total number of people available to work.

Keynesian Economics: An economic school of thought that pioneered the ideas and techniques of macroeconomic analysis by its study of aggregate demand. It contends that a higher level of inflation is preferable to an unacceptably high rate of unemployment in the short run.

Monetarism: A school of economic thought that believes the only means of influencing economic activity in the short term lies in controlling the quantity of money in circulation. Doing this causes prices to rise or fall until market equilibrium is reestablished.

Non-Accelerating Inflation Rate of Unemployment (NAIRU): The lowest possible unemployment rate that can be achieved without triggering an unacceptably high inflation rate.

Phillips Curve: The graphical representation of the inverse relationship between the rates of change in wages and unemployment.

Structural Unemployment: Long-term joblessness attributable to the irreversible economic decline of entire industries.

Underemployment: Working only occasionally or steadily for less than 20 hours a week for a comparatively low wage often at a job for which one is overqualified.

Utility-Maximizing Behavior: The assumption made by economists that because people are rational, they will pursue a course of action that best satisfies their needs and interests.

Bibliography

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Suggested Reading

Andresen, M. A. (2015). Unemployment, GDP, and crime: The importance of multiple measurements of the economy. Canadian Journal of Criminology and Criminal Justice, 57(1), 35–58. Retrieved from EBSCO online database SocINDEX with Full Text. http://search.ebscohost.com/login.aspx?direct=true&db=sih&AN=100160911&site=ehost-live&scope=site

Brand, J. E., & Thomas, J. S. (2014). Job displacement among single mothers: Effects on children’s outcomes in young adulthood. American Journal of Sociology, 119, 955–1001. Retrieved January 14, 2015, from EBSCO online database SocINDEX with Full Text. http://search.ebscohost.com/login.aspx?direct=true&db=sih&AN=95840960&site=ehost-live&scope=site

Croix, D., & de LaLicandro, O. (2000). Irreversibilities, uncertainty and underemployment equilibria. Spanish Economic Review, 2, 231-248. Retrieved June 3, 2008 from EBSCO online database Business Source Complete: http://search.ebscohost.com/login.aspx?direct=true&db=bth&AN=4688088&site=ehost-live

Fulcher, J., & Scott, J. (2011). Work, employment, and leisure. In Sociology (4th ed.). Oxford: Oxford University Press.

Johnson, M., Sage, R., & Mortimer, J. T. (2012). Work values, early career difficulties, and the U.S. economic recession. Social Psychology Quarterly, 75, 242-267. Retrieved November 6, 2013 from EBSCO online database SocINDEX with Full Text: http://search.ebscohost.com/login.aspx?direct=true&db=sih&AN=89464408

Liem, R. (1987). The psychological costs of unemployment: A comparison of findings and definitions. Social Research, 54, 319-353. Retrieved June 3, 2008 from EBSCO online database SocINDEX with Full Text: http://search.ebscohost.com/login.aspx?direct=true&db=sih&AN=24829974&site=ehost-live

Norris, G. (1978). Unemployment, subemployment and personal characteristics. Sociological Review, 26, 89-108. Retrieved May 15, 2008 from EBSCO online database SocINDEX with Full Text: http://search.ebscohost.com/login.aspx?direct=true&db=sih&AN=5467288&site=ehost-live

Pang, M., Lang, G., & Chiu, C. (2005). De-industrialization and the "disappeared workers." International Journal of Human Resource Management, 16, 772-785.

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Essay by Francis Duffy, MBA

Francis Duffy is a professional writer. He has had fourteen major market-research studies published on emerging technology markets as well as numerous articles on economics, information technology, and business strategy. A Manhattanite, he holds an MBA from NYU and undergraduate and graduate degrees in English from Columbia.