Economy

Problem of Unemployment & Labor force

If one goes as per the estimates & talks of the government officials then the economy is on the path of recovery. But, the sentiments among the citizenry are opposite to talks of officials. Professionals are not feeling good about their job prospects & youth have the fear and difficulty of finding one. This is the situation among all major advanced economies in the world – US, UK, Germany & France. Today we will discuss the  biggest problem of Unemployment & Labor force.

Correct measure of Unemployment

In March, According to US Labor Department, the unemployment rate fell to 4.5%. But this is not the complete picture.  This rate is based on the U3 measure. which includes the individual as unemployed in a limited version. A person is termed as unemployed if he is not having a job & is looking for one. i.e. he is in labor force but unemployed. These unemployed people will receive unemployment benefits. In the US, unemployment benefits run for 6 months where as there is no cap in the UK. Unemployment benefits in UK, can run for a decade or even for a lifetime.

It is at this point, where US unemployment static U3 is different than the UK. U3 measure counts individuals as unemployed only if they are receiving unemployment benefits. People outside it are not included in U3. They are included in U6, which includes all the unemployed peoples. It’s the U6 measure of US unemployment rate which is equal to UK & other European countries measure of unemployment.

With this taken account, US unemployment rate will be close to 7-8%. whereas the UK has close to 5-5.5%. Thus US unemployment rate is higher than the UK and even Germany, which has the lowest. France has the highest unemployment rate among the four major economies of the west at close to 10%.

The table shows the unemployment rate for the four big economies from 2011 to 2015. UK & Germany figures for 2016 were not available. This data has been taken from world data indicators.

Data Table

Sr. No. Variable Country 2011 2012 2013 2014 2015
1 Labor force with advanced education (% of total working-age population with advanced education) France 77.91 78.36 78.16 77.49 77.52
Germany 74.39 74.16 73.98 73.64 73.34
United Kingdom 85.03 83.68 84.07 83.69 83.77
United States 76.99 76.491 76.009 75.52 75.016
2 Force Of Labor with basic education (% of total working-age population with basic education) France 35.28 35 33.32 31.89 30.82
Germany 40.33 40.29 40.76 37.15 37.22
United Kingdom 46.98 43.26 43.63 56.96 56.91
United States 47.60 46.95 46.26 45.94 46.39
3 Unemployment with advanced education (% of total labor force with advanced education) France 5.17 5.43 5.98 6.32 6.3
Germany 2.37 2.31 2.35 2.47 2.32
United Kingdom 4.31 4.29 3.93 3.17 2.94
United States 2.26 2.1 1.94 1.68 1.36
4 Lack of employment with basic education (% of total labor force with basic education) France 14.28 15.19 16.28 17.31 17.51
Germany 12.94 12.19 11.79 11.71 11.15
United Kingdom 16.47 16.7 16.59 11.12 9.46
United States 16.49 14.93 13.61 11.29 9.9
5 Unemployment, total (% of total labor force) (national estimate) France 8.81 9.4 9.91 10.3 10.36
Germany 5.82 5.38 5.23 4.98 4.62
United Kingdom 8.04 7.89 7.53 6.11 5.3
United States 8.95 8.07 7.38 6.17 5.28
6 Labor force participation rate, total (% of total population ages 15+) (national estimate) France 56.26 56.47 56.45 56.24 56.06
Germany 60.09 60.07 60.35 60.41 60.17
United Kingdom 62.33 62.47 62.61 62.68 62.76
United States 64.11 63.7 63.25 62.89 62.65

 

Unemployment with advanced education is fairly low in all countries except France with the US being the lowest. But the unemployment with basic education is high in all four countries with France at whopping 17.51%.

Apart from France, other three nations have decreased their unemployment rates.

Fall in Labor Force Participation

Though the unemployment rate has decreased since the recession and is lowest since then. It is the numbers of the labor force which is of concern. The labor force participation rate is almost constant with a marginal increase. This increase is also in lower skill jobs which require basic education only & has low wages.

Here again, France performs the worst with at 56%. other three has comparable labor force participation rate with Germany hovering at 60%. and US, UK both at 62%. The important point to note here is that the participation rate is lower or equal to 2011 level for all four nations. This means that none of the countries has increased its labor force significantly.

A look at the figures, the labor force with advanced education and basic education makes this claim more subtle. Labor force with advanced & basic education is lower in 2015 than 2011 for all four countries. UK has the highest ratio of labor force both with advanced and basic education. This makes clear that the UK is a most educated country in the pool.

The fall in labor force is partly due to the demographic shift, retiring baby boomers. But there are other factors at play also. There is fundamental shift in the economy. Technology change & other factors have led to less demand for the labor force. The wages are not increasing at rates comparable to old times. Because of less demand for labor and requirements of very specific skills.

Higher unemployment Rate –New normal

Technology change impacts on the employment prospects have been very high. The two problems which surfaced because of technological changes are Hysteresis & Euro-sclerosis.

Hysteresis is based on the concept that unemployment depends on the past unemployment. According to this, high persistent unemployment makes some workers unemployed for such a long period that they have become unemployable. This is because of two factors – losing of skills due to time gap. Second, during the gap, working process in the industry get change because of technological advancement. The two factors combined make the unemployed individual unsuitable for employment. And this is the reason for low wages for the persons who had remained out for long. Sometimes even lower compared to the earlier level i.e. before losing the job.

Euro-sclerosis is related to the structural problem & the term got its name from the European countries. Labor unions in some of the European countries are very strong, France is a typical example. Presence of these labor unions reduces the adaptability of the labor force. Instead of embracing the technological change & to acquire new skills,. they resist technological change. This slows down both the economic growth rate & the new employment generation opportunities. Old methods cannot be held for longer and become obsolete after some time, thereby leading to job loss. But there is no equivalent amount of jobs in new opportunities,. because of the slow process due to resistance from the Unions.

Unemployment Benefits & Lower Wages

Under the pressure of these labor unions, governments tend to increase the unemployment benefits. These benefits restrict the minimum wage level. This removes lower wage jobs from the system. it explains what we observed earlier from data. Unemployment level with basic education, i.e. low skill unemployment is very high in France.  US has the lowest level because unemployment benefits in the US are lowest. As a result, US low skilled workers remain employed although at lower wages. Whereas in European counterparts, there was an increase in unemployment level for lower skilled workers.

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