The Active Population Survey (EPA) for the fourth quarter of 2019 shows that during the whole of last year there was a reduction in the number of unemployed by only 16,200: the worst data in seven years. Spain now has 3.2 million unemployed, which is the lowest volume in the last twelve years. It is very possible that from now on that figure will remain the same or, unfortunately, it will begin to rise.
The slowdown of the Spanish economy, together with international uncertainty, the rise in the minimum wage and the increase in social contributions are weakening the rate of job creation. In addition, a red light has come on, an alarm signal: unemployment, in Spain in terms seasonally adjustedhas been growing for three quarters.
Next, we will analyze the different types of unemployment. It is a pedagogical analysis whose sole purpose is to inform the general public and in a simple way that responds to the phenomenon of unemployment. Understanding why unemployment occurs helps to combat it.
The cyclical unemployment
It is no coincidence that these spectacular unemployment figures come in the midst of the worst economic crisis since the Great Depression. Unemployment is highly dependent on economic activity; in fact, it seems logical that when Aggregate Demand is strong, global production increases and more people are needed to produce more goods and services. On the other hand, when Aggregate Demand falls, companies cut jobs and unemployment rises. This type of unemployment is called in various ways: cyclical, short-term, insufficient aggregate demand or Keynesian. It is an involuntary and unpredictable unemployment that increases when aggregate demand falls, and vice versa.
But this cyclical unemployment is not reduced immediately when Aggregate Demand and production increase. Typically, companies first try to recover from a slowdown by getting the same group of employees to work or produce more, hiring only as the recovery takes hold. Thus, it may take time for cyclical unemployment to begin to decline, until well after the economy strengthens. The opposite happens when an economy starts to cool: companies prefer to cut hours or wages before laying off employees. Unemployment gains momentum only if the slowdown is prolonged. For this reason, unemployment due to insufficient aggregate demand is a indicator delayed of economic activity.
The sensitivity of the unemployment rate to economic growth depends on several factors, especially the conditions of the labor market and its regulation. For example, the okun’s law postulates that in Spain a 2% increase in GDP does not reduce unemployment.
Graph: Okun’s Law for Spain
Structural and Frictional Unemployment
It is worth asking whether, if economies were to expand indefinitely, unemployment would disappear. The answer is even negative. Will there ever be no more unemployment?
According to classical economic theory, all markets—including the labor market—should reach a point of equilibrium between supply and demand. But the very existence of unemployment seems to imply that this does not occur in any labor market in the world. Is the labor market suffering from permanent failure?
What prevents equilibrium in the labor market are several factors that generate structural unemployment: 1) the lack of professional training that can generate an inadequacy of the job offer to what companies demand, 2) labor regulations such as the legislation on the minimum wage, collective bargaining, unemployment benefits or severance pay, 3) unions when they ask for salary increases higher than those companies can pay, 4) taxes on work (in Spain they are called Social Security contributions) and 5) efficiency wages. When these rigidities in the labor market produce an excess supply, we speak of structural Unemployment, and the structurally unemployed population suffers, on average, longer periods of unemployment.
However, even if there is full employment there will always be some Unemployment, in the US, in February 2020, is only 3.5% of the labor force (active population), if only because there will always be people who leave one job to find another or are at the beginning of their working life. They are unemployed not because jobs are scarce in the market, but because finding a job takes time. This short-term and voluntary unemployment is called frictional unemployment.
The natural rate of unemployment (NAIRU)
The combination of these two factors frictional unemployment and structural unemployment produces a long-term average around which the unemployment rate usually hovers and is called natural rate of unemployment (TND) in Spain this type of unemployment is around 10%. The term “natural” does not denote either that it is natural or even an unchanging constant; on the contrary, it implies that this rate is a floor that is formed by the very characteristics of the labor market. And the labor market responds to current policies. For example, the relatively high level of unemployment in Europe, compared to the United States, is partly due to the fact that in Europe unions are more powerful and labor regulations are more rigid and strict. Thanks to these labor institutions, European workers theoretically have more bargaining power, but they can also prove too costly for employers. In the United States, unions are weaker and labor markets more flexible; that is why the employment rate in the US is usually lower than in Europe.
The natural rate of unemployment is sometimes called bowl non-accelerating price unemployment (NAIRU), because it reflects an economy that is growing in line with its long-term potential, with no upward or downward pressure on inflation. The problem is that if unemployment provisionally deviates from the NAIRU, inflation would suffer. Take the example of a recession, when economic activity is subdued. Faced with the drop in demand for goods and services (Aggregate Demand), companies begin to lay off staff and raise prices less. What one would then expect during a recession is a rise in unemployment and a fall in inflation. However, this relationship between unemployment and inflation —curve of Phillips— is getting weaker as the graph shows in the period 2010-19. Perhaps globalization, which has stagnated prices for years, is the cause of this flattening of the curve.
Understanding what causes unemployment and what the types of unemployment are, the authorities know what they can do —or not— to reduce it. For example, policies that try to reduce unemployment by stimulating consumer demand (and thus boosting production) work when there is excess productive capacity idle. If there is full employment, expanding Aggregate Demand will only have temporary effects, and at the expense of raising inflation later on. In contrast, policies that seek to alleviate frictional or structural unemployment can promote employment without necessarily affecting inflation.
However, the NAIRU can also change over time without explicit policies: structural changes, such as technological advances, upskilling, or demographic changes, can have lasting and positive consequences for unemployment trends. For example, many economists agree that the tech boom of the 1990s increased labor productivity, enhancing the “attractiveness” of each worker to employers, and thus reduced the NAIRU, although unemployment initially gave rise to leap because workers who were not prepared to use the new technologies found themselves displaced. Rapid population aging—which is occurring in many advanced economies—is another important factor reducing the number of people in the labor market and lowering unemployment.
The measurement of unemployment
Not everyone who doesn’t work is unemployed. For government statistics to count a person as unemployed, they must not only be without a job, but must also be actively seeking employment. In almost all the countries that have an organized statistical system, unemployment is measured by means of a quarterly or monthly survey that is carried out in homes and that covers a representative sample of the population. The labor force (active population) includes both people with work and those who are looking for it. The unemployment rate is the percentage of the labor force that does not have a job but is actively seeking employment. The ratio of the labor force to the working-age population is called Activity rate.
The labor force does not include people of working age who are neither employed nor looking for work—for example, pensioners, students, and housewives—but also does not include people who have looked for work for a while but have given up their search. They fell in the attempt and are workers discouraged (hidden strike) and it is one of the reasons why statistics can underestimate the true demand for employment in an economy.
Source: Ceyda Oner”Back to Basics: What Constitutes Unemployment?” Finance & Development, September 2010, Vol. 47, No. 3