In an earlier post, I explained how the reported U.S. unemployment rate, which was 9.6% in August of 2009, is measured. This post will explore the reported unemployment rate in more depth, distinguishing between the short-term, temporary sources of unemployment and the long-term, more structural, and troubling aspects of the unemployment rate.
The 9.6% U.S. unemployment rate remains the same next month if no one changes their employment status. But the rate also remains unchanged if the same number of people hired get fired. In truth, the U.S. unemployment rate nets out enormous flows of people into and out of the labor force and, for those in the labor force, between being employed and unemployed.
A representative month in the unemployment statistic tells the story. In May of 1993, there was no change in the reported U.S. unemployment rate. And yet, fully 5 million people got jobs that month; 3 million were just entering the labor force; the other 2 million were in the labor force but had been unemployed. In the same month, 5 million other people left employment: 3.2 million left the labor force, some for good reasons and some for bad, and 1.8 became unemployed.
The net reported U.S. unemployment rate also hides another very important phenomenon, and that is that there are two distinct types of unemployment: short-term and long-term unemployment. The fact is that some short-run unemployment is desirable. In general, it is better for people to take some time in finding the ideal job, one in which they are productive, happy, and satisfied. If individuals always take the first job offer that comes along, rather than searching for a good fit, the odds of a bad match and future job separation increase.
Chronic unemployment is a bad thing, however. The economic, social, and psychological costs of the chronically unemployed are enormous.
Policymakers must carefully weigh the costs and benefits to society of the type of unemployment insurance they support: a little unemployment insurance for a short period helps people to find the right job, which is a good thing. Too much unemployment insurance over too long a period encourages slack and enables more structural, long-term unemployment, which is a very bad thing for our economy.
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