Zero Unemployment - Why is it impossible?

Summary:

It is impossible for unemployment ever to be zero.

Why Unemployed;

The Nature of Unemployment;

Cyclical Unemployment;

Frictional unemployment;

From Unemployment to Full Employment;

This is an article describing the different kinds of unemployment, how unemployment occurs, and also explaining why it is impossible for unemployment ever to be zero.

    Unemployment is one of the biggest problems which world economies face. Even economies that are flourishing and see constant growth in GDP, still have to find solutions to manage unemployment and keep it at a minimum level.

Why Unemployed?

    Unemployment. An infamous word that undoubtedly brings fear to most people and governments in the world. People depend on jobs for their survival. But what is really unemployment? Most people describe unemployment as not having a job. More specifically, people, who are part of the workforce (i.e. people who would like to work but are unable to find a job), but have no job are considered unemployed. They become unemployed if they loose their jobs, leave their jobs or enter or re-enter the workforce. People who enter the workforce are mainly graduate students. People who re-enter the workforce are people who, for various reasons, temporarily have not been looking for jobs but are now.

    Job losers are the biggest source of unemployment. These are people who have been made redundant. Especially in troubled economies, where the easiest way of reducing industrial costs is by reducing the number of workers, such people account for most of the unemployment (we can observe the effects of lay offs on a global scale from the beginning of 2008, after the US and then a couple of other countries' economies went into a recession).

    Entrants also make up a significant part of unemployment. The majority are school graduates. On any given day in 1997, over one-tenth of those recently unemployed were entrants to the labour market. Unemployment of this kind is not necessarily bad, since increase in entrants is due to education growth.

    To measure unemployment, we measure the number of people who are not employed and are actively looking for work.

The Nature of Unemployment

    Unemployment is generally classified into three groups: cyclical, frictional and structural.

    Cyclical Unemployment. 

Cyclical or demand-deficient unemployment occurs when aggregate desired expenditures in the economy are insufficient to purchase the output that would be supplied when the economy is at potential GDP. Cyclical unemployment is the fluctuating unemployment that coincides with the business cycle. It is a repeating short-term problem for most economies. It increases during a recession and decreases during a recovery and expansion. People who experience such unemployment are usually laid off during recession and rehired some months later.

    Frictional unemployment

 is the unemployment that arises as part of the normal turnover of labour. A reason for this could be people constalntly entering the workforce (such as school leavers) and other people retiring and creating vacancies for the entrants or re-entrants to fill.

    Another reasons is the churning of individual businesses. Some businesses fail, close down so workers lose their jobs. Other businesses are started and hire workers. People who lose their jobs in this process are frictionally unemployed and they are trying to match their skills to the new vacancies. It takes time for employers and workers to find an appropriate match. Workers look at various jobs to find the best one that suits them. Employers interview different candidates to choose the one that fits best to the job. Frictional unemployment is not usually regarded as a problem, but it is a permanent, long-term phenomenon. A major role behind the size of frictional unemployment is the level of unemployment benefit that the government provides. If more people are provided with such benefit and if the benefit is high enough, it takes longer for them to find jobs, so frictional unemployment is greater.

    The third unemployment group is structural. It occurs when there is a mismatch between the characteristics and skill of the people looking for work and those characteristics and skills desired by potential employers. Changes in technology and international competition constantly eliminate jobs that use different skills or are in different locations from the ones where new jobs are created. Such unemployment usually lasts longer than frictional unemployment because people need to be retrained and possibly to relocate to find jobs.

    Structural unemployment is a major problem especially for older workers, for whom retraining and relocation is very difficult. Such people often choose early retirement with a lower income than previously expected.

    On the other hand, young workers with families, may retrain, take the other short-term jobs, or relocate to take advantage of better opportunities.

    Similarly to frictional unemployment, an important factor influencing peoples' decisions is the level of unemployment benefit. Studies of the unemployment in the European Union indicate that a strong correlation exists between the lenght of time people are able to receive unemployment benefit and the duration of unemployment.

    The rate of unemployment when all the unemployment is frictional or structural is known as the natural rate of unemployment. One could view the natural rate of unemployment as the rate of unemployment when all markets are in equillibrium. As real GDP fluctuates around the potential GDP, the unemployment rate fluctuates around the natural rate of unemployment. When the unemployment rate equals the natural rate of unemployment, real GDP equals potential GDP. However, the reverse is not necessarily true, since hiring labour takes time, So, changing the unemployment rate can lag behind the changes in GDP.

From Unemployment to Full Employment

    It is known worldwide that there is always some unemployment. People are laid off or are looking for jobs. So what is meant by full employment? Does it mean that there is zero unemployment? Not really. There is no unique definition of full employment. One could say that it is a situation where the labour market has reached a state of equillibrium - i.e. when those in the active labour force who are willing and able to work at going wage rates are able to find work. At this point the remaining unemployment whould essentially be frictional. Most economists worldwide believe that even at full employment, there will always be some frictional unemplyment caused by people moving into the workforce and people changing jobs. In general, full employment occurs when the unemployment rate equals the natural rate of unemployment.


    In Fig. 1 it can be seen that the natural level of unemployment is not zero. At the equillibrium wage W₁ (where labour supply = labour demand), there is unemployment measured by AB made up of frictional and structural unemployment.

    In recent years, there have been a few countries that have made a significant effort to reach full employment.


    Fig. 2 shows the unemployment rates for the USA, UK and Germany. It can be clearly seen that Germany have a major unemployment problem. However, in the UK and USA the unemployment rates are at their lowest for over twenty years.

    So, how could UK reach full employment. In the UK, according to the claimant count measure, there are 1.2 million unemployed seeking benefits - 4% of the workforce. Assuming that full employment is reached at 98% (i.e. 2% unemployment), the economy would have to create another 800,000 to 1,000,000 new jobs.

    Unfortunately, there is a very serious obstacle for reaching full employment. As more people would have jobs, consumer expenditure would increase, which would cause inflation (see Fig. 4).

    In order to have a healthy economy, the government has to try to get closer to full employment and control inflation at the same time.

Conclusion

    It can clearly be seen that unemployment is a great problem for most economies. It is made up of cyclical, frictional and structural unemployment. Economists look at the natural rate of unemployment (frictional plus structural) to describe when unemployment is in equillibrium. When unemployment is at its natural rate there is full employment.

    However, there can never be zero unemployment. There will always be some frictional unemployment. There will be people who are looking for jobs, graduate students who enter the workforce and people losing or leaving jobs, No matter how many jobs are created, normal labour turnover will always remain. It is just a matter of keeping unemployment at its minimum and at the same time control inflation which could well arise from the decrease in unemployment. It is a hard task for all economies and all governments should maximise their efforts in order to achieve a balance.