Macroeconomics
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Unemployment
Unemployment is non-voluntary removal from the workforce, for example, someone who is considered willing and able to work, but cannot find work. Unemployment is different from wilful removal from the workforce for purposes such as education or retirement. The problem of unemployment together with poverty continues to be an open unsolved problem attracting the attention of economists. In particular the economist John Maynard Keynes’s book “The General Theory of Employment, Interest and Money (Keynes, 1936) has made a lasting impression on the field in practice and has stood the test of time. Policies, models that are motivated by Keynes’s theories or the economists that promote them are called “Keynesian”. Unemployment can be thought of as a market failure either temporarily or permanently loss of demand for labor. Unlike short term unemployment < 6 months which can be recovered back to its previous level, long term unemployment is potentially more serious and can have permanent losses of social, human capital. The direct costs can be physical, mental health, lower re-employment wages, social stigma and secondary costs can be transferred and indirect costs to family, children, contagion effect in neighborhoods and communities (Nichols, 2013). Depending on the severity of the % of the population affected, the effects of long term unemployment then can potentially spread to other parts of the community and in an extreme case could undermine labor productivity and real wages.
Macroeconomic dynamics
Employment and wages respond to many macroeconomic conditions. Relationships between macroeconomic measures are complex. Table A.3 and A.4 summarizes some of those relationships as they relate to employment, wages and GDP drawn from economics from Core Economics. Many of these relationships are active topics of debate and research within the field of economics. Each row represents an economic condition and each cell represents for each of the observed measures the expected response to an impulse increase in the economic condition with all other conditions held constant.
Capital accumulation includes all forms of capital - physical, human and intellectual. Inflation here refers to an increase in demand that is faster than the supply of goods and services. The elasticity of substitution of labor and capital is considered a feature of the particular line of business and is related to the relative change in output of the firm changes from an increase in labor vs capital inputs. An increase in the labor supply can be due to the effects of either immigration, fertility, hours per worker or eligibility criteria. Wage bargaining refers to institutions of organized labor that negotiate the terms of labor either at the firm or the industry level. Labor force participation is the number of people employed as a % of the total population and the eligible workforce are the percentage number who are counted able and willing for employment. For example an increase in the retirement age would increase the eligible workforce but would not immediately result in an increase in the labor force participation.
Employment responds to different measures on short vs long time scales. In the short run, changes in investment and the expansion of credit influence inflation and capital accumulation. For this reason an expansionary phase of the business cycle with an increase of credit and investments in the short run corresponds to simultaneous observation of increase in nominal GDP, nominal wages and lower unemployment.
There can be multiple unique dynamics for the causes and remedies for short term (<6 months) vs long term unemployment. The factors that lead to long term “structural” unemployment can be different and have different remedy solutions from short term “cyclical” unemployment. Structural unemployment is considered as a supply demand mismatch in the labor market for skills (Rockafeller Foundation, 2013 ; FRBNY, 2013).
In the long run the aim is to sustain investments to increase productivity and accumulate all forms of capital - physical, labor and intellectual. If this is achieved the expected results are low unemployment and increasing real wages. Aside from accumulation of capital through investments, for a number of other relationships real wages and labor demand tend to move in opposite directions. Labor demand can disconnect from unemployment if there are changes to the average hours worked per worker or the eligible workforce such as a change to the retirement age or more women or minorities which had previously been restricted.
Slow moving disruptions and sudden shocks
Technological unemployment, one type of structural unemployment, is a term used by Keynes as the consequence of improvement in labor productivity and fewer demand for employment hours to meet the same level of demand (Lee, 2017). Technological unemployment here is intended to mean a long term, slow moving disruption with no major loss of the other forms of capital. There are numerous short term disruptions that can cause a sudden mismatch as a result of destruction of capital or disruption of the other conditions for firms to operate. For example a war disrupts firms ability to operate either from being cut-off from services, energy, raw material supply even if they retain all of their capital. A pandemic outbreak can have a similar effect for firms that are not prepared to survive a shock of lost business for the duration of the outbreak. A few other common forms of shocks are hyperinflation, corruption, and civil unrest. In each of these shocks the institutions of the society that enable markets to function become disrupted such as stable prices, law and order and can have the same effect as a pandemic at shutting down businesses and permanent loss of capital. The significance of the role of hyperinflation as a shock is that it is the reverse of the short term (< 6 months) inverse relationship of small changes in unemployment and inflation. So policy that by design sets targets on inflation for adjusting short term employment should understand the limits and difference between normal and hyper-inflation conditions.
Structural employment : prevention and remedies
Prevention of the future risk of structural unemployment is one of the state demands for public investments into human capital. The general remedies for structural unemployment presented here are two recommendations from a report by the Rockafeller Foundation.
Remedies to structural unemployment (Rockafeller Foundation, 2013)
Education and training
Social welfare safety net
A third possible remedy could be the inter-mediation role that entrepreneurs play in identifying and correcting market failures. Entrepreneurs are opportunists that are able to identify and resolve arbitrage opportunities. Labor market mismatch in some cases may be considered one type of arbitrage. The role of education is to address the root cause of the skill mismatch, but it can take a long time, so the need for the social safety net is to cover the transition period to avoid further social and human capital losses.
In contrast to long term structural factors of unemployment, changes to employment due to short term fluctuations in aggregate demand from the business cycle is a principal concern of Keynesian economics.
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