Decrease in employment rate effects on economy globally
The number of people employed in an economy is closely tied to its growth rate. During the global recession that began in 2008, unemployment reached unprecedented levels. According to the International Labor Office, over 200 million people, or 7% of the global workforce, were seeking jobs in 2009. This surge in unemployment coincided with the worst economic crisis since the Great Depression, highlighting the strong relationship between economic activity and employment. When economic activity is high, businesses require more workers to meet the increased demand for goods and services. Conversely, during economic downturns, firms reduce their workforce, leading to higher unemployment. This relationship makes unemployment a countercyclical indicator, rising when economic growth slows and falling when it accelerates.
However, the relationship between growth and unemployment is not immediate. Businesses often respond to initial economic recoveries by increasing productivity rather than hiring new workers. This delay means unemployment may begin to decline only after growth has been sustained for some time. Similarly, during a downturn, firms might reduce work hours or implement pay cuts before resorting to layoffs, which can delay the rise in unemployment. Because of these lags, unemployment is considered a lagging indicator of economic activity.
The sensitivity of unemployment to economic growth varies across economies and depends on labor market conditions and regulations. For example, in the United States, Okun’s Law suggests that a 1% decline in unemployment corresponds to a 2-3% increase in output. This inverse relationship raises an important question: can unemployment ever disappear entirely? Historically, even during periods of strong economic growth, unemployment has never fallen to zero.
The persistence of unemployment can be explained by several factors. Classical economic theory posits that labor markets should clear when supply meets demand. However, in reality, wages often do not adjust sufficiently to balance the labor market. Structural unemployment occurs when rigidities, such as high minimum wages or mismatches between worker skills and job requirements, prevent the market from clearing. Additionally, frictional unemployment, which occurs when people are between jobs or entering the workforce, ensures some level of joblessness even in healthy economies.
The combination of structural and frictional unemployment gives rise to the natural rate of unemployment (NRU), around which the unemployment rate fluctuates. This rate, also known as the non-accelerating inflation rate of unemployment (NAIRU), reflects the equilibrium at which the economy grows without putting upward or downward pressure on inflation. Policies can influence the NRU by addressing structural and frictional unemployment, such as through job training programs or incentives for workforce mobility. However, boosting consumer demand to reduce unemployment only works temporarily and often leads to inflation.
Structural changes, like technological advancements and demographic shifts, can also influence unemployment trends. For instance, the technology boom of the 1990s increased labor productivity and reduced unemployment in the long term, despite initial disruptions for workers who lacked relevant skills. Similarly, aging populations in advanced economies contribute to a smaller labor force, potentially lowering unemployment rates.
Unemployment is measured by considering those actively seeking work. In the United States, the Bureau of Labor Statistics conducts monthly surveys to determine the unemployment rate, which is the proportion of the labor force (employed and job-seeking individuals) without jobs. However, this measure can underestimate job demand. It excludes discouraged workers who have stopped searching for jobs and those in part-time positions who would prefer full-time employment. These limitations mean that official statistics may not fully capture the extent of unmet demand for jobs in an economy.