When an Increase in Unemployment Numbers Are Good News
The Technical Definition of Unemployment
People are often surprised to hear what sounds like bad economic news being presented as good news.
As an economic downturn bottoms out and the economy starts to recover one of the first signs of such a recovery is an increase in the unemployment numbers. Normally, an increase in the unemployment rate is bad news as people are losing their jobs.
However, both economists and policy makers define unemployed people as those who are both out of work and actively looking for work.
For employment purposes, policy makers divide the population into two groups:
- Those in the Workforce
- Those NOT in the workforce
Those in the workforce include everyone who is either employed or is not employed but actively seeking work.
Those NOT in the workforce include children too young to work, full time students, retired people, people who are institutionalized (in prison, mental hospitals, etc.) and others who are neither employed or actively trying to become employed.
Discouraged workers, those who have been laid off and want to work but, due to a depressed labor market have given up looking for a job. Since they are neither employed nor actively looking for work, these discouraged workers are no longer considered to be a part of the labor force for statistical purposes.
A downturn in the economy results in people being laid off thereby increasing the unemployment numbers.
This is bad news because it is proof that the economy is weakening. As the economy continues to weaken, unemployment will continue to rise as more and more people are laid off.
However, at some point the unemployment numbers will begin to decline, not because people are returning to work but because they are becoming discouraged at not being able to find work.
The current great recession has resulted in numerous unemployed workers becoming discouraged and giving up on looking for work. Many of the reported declines in the numbers of unemployed during this recession have been the result of unemployed giving up seeking work rather than resulting from a decline in layoffs or increase numbers of unemployed finding work.
Surviving Without Work
While the current 2007-08 economic downturn and the similar Great Depression of the 1930s have both resulted in large numbers of unemployed and widespread economic hardship, neither have resulted in things like mass starvation and other extreme hardships that resulted from severe economic downturns in centuries past.
Despite these downturns, the U.S. and other developed nations have large amounts of accumulated wealth which helps to mitigate the damage resulting from these two severe economic downturns.
Social safety nets such as unemployment insurance benefits, extended unemployment insurance benefits, food stamps, welfare and other public social services have helped mitigate the worst effects of being out of work. Despite the high unemployment numbers, both the current and 1930s depressions saw more workers keeping their jobs than those losing them.
In addition to public safety nets, many unemployed also have access to personal savings and other resources. Savings, equity in homes and other personal assets and credit have helped many unemployed to survive without work. Many also have working spouses as well.
In both the 1930s and today many younger workers have survived the downturn by moving back with parents or other relatives while postponing marriage and starting families. Many of today's older workers have tapped into Social Security and retirement pensions early as a means of dealing with the recession.
While such belt-tightening is never pleasant, it has enabled today's unemployed to minimize the agony of being unemployed and helped many to survive financially until the economy improves.
The Economy Eventually Improves
At some point the economy begins to turn around and before this begins to show up in the statistics, out of work workers begin to see the early signs as they hear about or know people who are being called for job interviews.
When the economy hits bottom and begins to turn around, employers first stop laying off people which results in the unemployment ceasing to increase. As the economy starts to grow once again, employers find themselves having to slowly start hiring again which can result in a slight decline in the unemployment numbers.
While a halt in the increase in numbers of unemployed or even a slight decline in unemployment may have little or no effect on the mood of discouraged workers, the sight of unemployed people they know suddenly finding work definitely gives them new hope and many begin to start looking for work again.
Once these formerly discouraged workers return to actively seeking work their status, in the eyes of policy makers and economists, changes from being a labor force drop out to again being considered to be unemployed. This results in a temporary rise in the numbers of people classified as unemployed. However, with no corresponding increase in new layoffs, the increase is the result of people beginning to look for work again with new confidence of finding a job.
This is when an increase in unemployment is good news for a change.
© 2009 Chuck Nugent