notes4fspring2018wpd.pdf - MACROECONOMICS 201(Spring 2018...

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MACROECONOMICS 201 (Spring 2018) NOTES 4 UNEMPLOYMENT AND ITS CAUSES A. How employment is measured B. Structure of unemployment C. Helping unemployed workers find jobs Reading Assignments: Principles of Economics: Chapter 15 & 21 Madariaga: 30, 31 Introduction: The study of macroeconomics, in its present form, mostly originated during the 1930's. Prior to that time, many economists had a rather rosy view of a market economy. It was assumed that, via the invisible hand of Adam Smith, that the economy was self adjusting. Prices were constrained by the gold standard since the gold standard prevented the government from creating new money whenever it did not want to raise taxes (since the supply of gold was limited). Unemployment was assumed to be self-correcting (so it was believed) because most unemployed workers would accept lower wages, eventually, if necessary in order to find work, the types of products produced were governed by consumer sovereignty, and industry would be propelled by competition to achieve a high level of productive efficiency. Later, we will identify these beliefs as the basis of “classical economics.” Of course, not all economists were this optimistic. Most knew that there were periodic problems of unemployment, but they felt that in the long run these unemployment issues would be self correcting. Remember the term, the long run . It will become very important in a few weeks. But you need to begin thinking about it now. Few of you can go for more than a day or two without food, and many of you have to pay a monthly rent or mortgage payment. If you did not have an income, you might find little comfort in listening to a cheerful economist, secure in a tenured university job, explain that you only need to be patient, and a job will eventually come around, at some unknown future time, that would enable you to afford these and many other necessary items. In the decade following World War I, the economy in the U.S., and most of Europe, prospered. And then came the great depression where unemployment and the suffering of many others, even though if they were technically employed, but sometimes sporadically and often at very low wages, caused suffering to reach unbearable levels. It was so bad that it might have caused the demise of capitalism in this country had it continued. There appeared to be some recovery in the later 1930's, but it was not until WWII, when the need for workers reached unprecedented levels and virtually eliminated unemployment, that the economy fully recovered. During the war, even some people in institutions caring for people with disabilities , sometimes severe, were released and employed. The following data shows unemployment in the U. S., as measured by the U.S. Department of Labor from 1926 to 1944.
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2 1926 1.8% 1927 3.3 1928 4.2 1929 3.2 1930 21.4 1931 15.9 1932 23.6 1933 24.9 1934 21.7 1935 20.0 1936 16.9 1937 14.3 1938 19.0 1939 17.2 1940 17.4 1941 9.9 1942 4.7 1943 1.9 1944 1.2 The swings in the percentage of the population unable to find work during this period are astonishing. And for reasons to be discussed shortly, unemployment rates show only part of the
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