Job creation and unemployment are affected by factors such as aggregate demand, global competition, education, automation, and demographics. These factors can affect the number of workers, the duration of unemployment, and wage rates.
Overview There are a variety of domestic, foreign, market and government factors that impact unemployment in the United States. These may be characterized as cyclical (related to the business cycle) or structural (related to underlying economic characteristics) and include, among others: Economic conditions: The U.S. faced the subprime mortgage crisis and resulting recession of 2007–2009, which significantly increased the unemployment rate to a peak of 10% in October 2009. The unemployment rate fell steadily thereafter, returning to 5% by December 2015 as economic conditions improved. Demographic trends: The U.S. has an aging population, which is moving more persons out of the labor force relative to the civilian population. This has resulted in a long-term downward trend in the labor force participation rate that began around 2000, as the Baby Boomer generation began to retire. Technology trends, with automation replacing workers in many industries while creating jobs in others. Globalization and sourcing trends, with employers creating jobs in overseas markets to reduce labor costs or avoid regulations. International trade policy, which has resulted in a sizable trade deficit (imports greater than exports) since the early 2000s, which reduces GDP and employment relative to a trade surplus. Immigration policy, which affects the nature and number of workers entering the country. Monetary policy: The Federal Reserve conducts monetary policy, adjusting interest rates to move the economy towards a full employment target of around a 5% unemployment rate and 2% inflation rate. The Federal Reserve has maintained near-zero interest rates since the 2007–2009 recession, in efforts to boost employment. It also injected a sizable amount of money into the economy via quantitative easing to boost the economy. In December 2015, it raised interest rates for the first time moderately, with guidance that it intended to continue doing if economic conditions were favorable. Fiscal policy: The Federal government has reduced its budget deficit significantly since the 2007–2009 recession, which resulted from a combination of improving economic conditions and recent steps to reduce spending and raise taxes on higher income taxpayers. Reducing the budget deficit means the government is doing less to support employment, other things equal. Unionization: The ratio of persons represented by unions has fallen consistently since the 1960s, weakening the power of labor (workers) relative to capital (owners). This is due to a combination of economic trends and policy choices.
Domestic factors There are many domestic factors affecting the U.S. labor force and employment levels. These include: economic growth; cyclical and structural factors; demographics; education and training; innovation; labor unions; and industry consolidation In addition to macroeconomic and individual firm-related factors, there are individual-related factors that influence the risk of unemployment. These factors include gender, race/ethnicity, family background, industry, level of education, and level of job tenure. There is an employment gap between Whites and African Americans, although smaller for high-skilled workers than low-skill workers which suggests the presence of racial discrimination. Education is found to be positively correlated with employment, which implies that groups with higher levels of education generally have lower unemployment rates. The effects of incarceration and emotional functioning have also been explored. At the community level, for example, jail incarceration has been found to negatively affect local labor markets, especially in areas with relatively high proportions of Black residents.
Macroeconomic Explanations Macroeconomic conditions affect both the quantity and types of jobs that are available.Tausig M. (2013) The Sociology of Work and Well-Being. In: Aneshensel C.S., Phelan J.C., Bierman A. (eds) Handbook of the Sociology of Mental Health. Handbooks of Sociology and Social Research. Springer, Dordrecht Frictional unemployment occurs when a worker is voluntarily between jobs. This is normal and healthy for the economy, as it increases the matches between job openings and seekers. Structural unemployment is caused by structural changes in the economy. This includes technological changes and the movement and relocation of certain industries. Cyclical unemployment is caused by the various stages of the business cycle; more specifically the recession and recovery stages. During a recession, output production temporarily falls due to lack of demand, and as a result fewer workers are needed. This was a popular explanation of unemployment during the Great Depression, when many believed unemployment to be "no fault" of the individual workers. Although not taken into account for calculations of monthly unemployment data, seasonal unemployment is most prevalent in jobs associated with the yearly seasons, and is when a worker is looking for employment during the "off-season" of their industry (e.g. a ski lift operator looking for employment during the summer). Structural and cyclical unemployment are the most common and the leading explanations for causes of unemployment. They are also the most prevalent during recessions, depressions, and financial crises.
Cyclical vs. structural unemployment
There is ongoing debate among economists regarding the extent to which unemployment is cyclical (i.e., temporary and related to economic cycles, and therefore responsive to stimulus measures that spur demand) or structural (i.e., longer-term and independent of the economic cycle, and therefore requiring process reforms and re-allocation of workers among industries and geographies). A general reduction in employment across multiple industries would likely be cyclical, while a skills or geographic mismatch for available jobs would be structural.
During the Great Depression, "hard core" structural unemployment was very common. Hard-core unemployment refers to individuals that have been unemployed for a prolonged period of time (i.e. six months, over a year). The hard core unemployment phenomenon present in the 1930s is believed to be caused by not only the depression, but also a shift in business personnel policies. In the 1920s, businessmen found the most profitable wage to be the "efficiency wage", one that attracted more productive workers. This resulted in new policies designed to find trained, efficient workers, and to encourage other workers to become more like them.
Ben Bernanke stated in November 2012: "[T]he slow pace of employment growth has been widespread across industries and regions of the country. That pattern suggests a broad-based shortfall in demand rather than a substantial increase in mismatch between available jobs and workers, because greater mismatch would imply that the demand for workers would be strong in some regions and industries, not weak almost across the board. Likewise, if a mismatch of jobs and workers is the predominant problem, we would expect to see wage pressures developing in those regions and industries where labor demand is strong; in fact, wage gains have been quite subdued in most industries and parts of the country."
The Congressional Research Service summarized a variety of studies that indicated changes in unemployment between 2007 and 2010 were 65–80% cyclical, thus mainly due to reduced aggregate demand for goods and services. Labor mobility was not a key issue due to the widespread nature of job losses across geographies and industries. Cyclically sensitive industries such as manufacturing and construction had the most significant job losses. One study referenced in the CRS research indicated that long-term unemployment can convert cyclical to structural unemployment through loss of skills.
Mohamed El-Erian wrote in May 2011: "Unemployment must be seen as much more than a cyclical problem; it's a structural one that requires concurrent progress on job retraining, housing reform, education, social safety nets and private-sector competitiveness ... America's political parties must jointly agree [to make] progress on the structural-reform agenda". Several tools, such as the Beveridge curve are used to help analyze the extent of structural unemployment.
The term frictional unemployment refers to the period when workers are searching for a job or changing jobs. It is sometimes called search unemployment and can be voluntary based on the circumstances of the unemployed individual. Frictional unemployment is always present in an economy, so the level of involuntary unemployment is properly the unemployment rate minus the rate of frictional unemployment.
Involuntary vs voluntary unemployment: Job loss is considered to be a form of involuntary employment, and occurs when workers are either fired or laid off. Typical factors for lay offs are the downsizing or restructuring of firms, the closing of plants, and the relocation of a firm and/or industry. A worker leaving a job for health reasons is also considered to be involuntary job loss. This is because, although the worker rather than the employer made the decision, the worker has no control over the situation. Frictional, seasonal, and cyclical unemployment are usually involuntary since they are caused by external factors. Voluntary employment is usually a conscious decision that can be influenced by external factors. Job-seeker benefits and allowances constitute some of these external factors. Job-seekers' benefit is a payment given to the short-term unemployed. Job-seekers allowance is typically given to those whose insurance benefits are not adequate, or do not have enough benefits to qualify for job-seekers' benefit; it acts as a safety net for these individuals.
The Natural rate of unemployment refers to the rate of unemployment due to structural or supply-side factors alone. Cyclical factors, such as government stimulus or austerity policies, cause the actual unemployment rate to vary around the natural rate. Economists debate the natural rate of unemployment. During February 2011, Federal Reserve economists estimated it may have increased from the historical rate of around 5% to as high as 6.7%. CBO estimated the rate of a closely related measure called NAIRU at 5.2%, up from 4.8%.
Demographics and labor force participation rate
Demographics have a significant impact on the labor force and therefore employment statistics. The U.S. population is aging and the Baby Boomers are moving into retirement, so a greater share of the population is either leaving the labor force (retired) or moving into an age bracket with a lower typical labor force participation (LFP) rate.Calculated Risk-Decline in Labor Force Participation-December 7, 2014
There are two primary measures of labor force participation: Labor force relative to civilian population: This measure peaked in 2000 and has declined steadily for the most part since, flattening during the housing bubble (2004–2007) then falling since the 2007–2009 recession. The gradual decline is indicative of a primary demographic effect, with a secondary effect of the 2007–2009 recession on the trend. Employment relative to civilian population: This measure also peaked in 2000 and fell during the 2001 recession, recovered during the housing bubble, then fell dramatically during the 2007–2009 recession and has stabilized thereafter. It has fallen significantly in each of the past three recessions. This trend is indicative of a primary effect from the recession and secondary effect of demographics.