PART I
NATIONAL SETTINGS OF UNEMPLOYMENT
INTERPRETING U.S. UNEMPLOYMENT RATES
Theodore Caplow, Charlottesville
Figure 1 shows the U.S. unemployment rates from 1900 to 1998, covering all
but one year of the twentieth century. During the first part of the century, unemployment oscillated wildly - especially from its low point in 1926 in the midst of
hectic post-war prosperity to its peak in 1933 when slightly more than
one-fourth of the labour force was counted as unemployed. The rate advanced to
another low point in 1945 when the effect of withdrawing thirteen million people from the labour force for service in the armed forces and the extreme manpower demands of wartime industry reduced unemployment nearly to zero.
Since 1950 the fluctuations have been much milder and in the post-war decades
there was a consensus among American economists that a minimum unemployment rate of at least 5 percent was necessary to avoid runaway inflation. As it
turned out when unemployment dipped below 5 percent in 1997 and stayed below 5 percent throughout 1998, inflation remained close to zero and none of the
projected ill effects appeared.
Figure 1
The U.S. unemployment rate: 1900-1998
Before and after the Great Depression of the 1930s, unemployment was almost exclusively a blue-collar affliction. In 1924 with the general rate of unemployment at a very low level, it was nevertheless reported that nearly two-thirds
of the male factory workers in a sample of families in Middletown, the Midwestern industrial city studied by Robert and Helen Lynd, had at least one spell
of unemployment during the first nine months of 1924. None of the white-collar
workers in their sample had that experience (Lynd and Lynd 1929). Blue-collar
workers were susceptible to lay-off without notice as, with certain limited exceptions, they still are in the U.S. while managers, professionals, and other
white-collar workers were effectively immune from dismissal without cause and
remained so until a comparatively recent time.
Figure 2 compares the unemployment experience of the United States with
that of the three large developed nations which are closest to the U.S. in political
culture and in level of modernisation. What leaps out from the figure are the
similarities in the recent experience of these four nations? All of them show less
oscillation of unemployment in the second half of the century than in the first.
All of them experienced comparatively low unemployment in the 1960s and a
renewed surge of unemployment in the 1980s. During the early part of the century the discrepancies were more conspicuous. The U.S. and the UK experienced high unemployment immediately after World War I. France and Germany,
with their labour forces significantly reduced by wartime casualties, did not. The
U.S. and France both experienced a surge of prosperity in the middle 1920s that
reduced their unemployment rates to the low points of the century
Figure 2
Unemployment rates of large developed nations
Percent of labour force
while Germany and the UK were suffering relatively severe economic dislocations. Similarly we note that unemployment in France was not significantly
raised by the Great Depression and that Germany experienced a surge of unemployment after World War II that was not matched by the victorious allies. The
most important discrepancy that appears in Figure 2 is that for most of the century the posted American unemployment rate was higher -sometimes very much
higher - than those of the other three countries. The differences were particularly
marked in prosperous years. In 1962, for example, with the German unemployment rate at an almost invisible 0.5 percent, the French rate at 1.3 percent, and
the British rate at 2.9 percent, the U.S. was celebrating what was then considered a very favourable rate of 5.6 percent.
The reversal of the U.S. situation that took place in the early 1980s with respect to France and the UK and that persisted into the 1990s when Germany,
too, developed a severe problem of long-term unemployment is of historic significance. According to Pugliesi (1998) “the 1990s has seen a general worsening
of the [European] labour market situation: unemployment has hit countries such
as the Federal Republic of Germany and Sweden and has kept increasing in
Southern European countries, e.g. Italy and Spain”.
Both the relatively higher American rates of earlier years and the relatively
lower American rates that prevail today are closely linked to differences in employer/employee relationships among these countries, particularly the sharp contrast between traditional provisions for employment security in Britain and
France and the virtual absence of such provisions in the United States , with the
UK occupying an intermediate position. It often comes as a surprise to foreign
observers to learn that ordinary workers in American enterprises can be, and often are, dismissed without notice after years of steady employment - a procedure
that would be legally and politically impossible in other advanced industrial
countries. During that long period of time when American employment rates
were prevailingly higher than those in peer economies, it was widely believed
that employment insecurity was the price that the U.S. paid for its relatively high
Gross National Product.. The argument was that the lack of employment security
made it easier to restructure enterprises and to maximise their productivity. Europeans during that same period pointed to the social benefits of employment
security while acknowledging the possibility that job tenure might, under some
circumstances, be an impediment to economic growth.
Recent developments have somewhat shifted the ground under these views.
On the one hand, employment security has conspicuously lessened in the United
States for several different reasons. In the early part of the century, blue-collar
workers could be, and often were, laid off and rehired from week to week.
White-collar workers, especially middle managers in large-scale enterprises enjoyed virtual life tenure; dismissals were rare and only for grave cause. That situation changed abruptly in the restructuring frenzy that seized the American
economy in the 1980s when thousands of corporate mergers occurred and almost
every corporate merger involved down-sizing that affected the managerial and
administrative cadres. Suddenly, middle-aged middle managers were being dis-
missed with as little notice as factory workers. Meanwhile factory workers, too,
have been losing rather than gaining job security as the bargaining position of
labour unions has declined nearly to the vanishing point . The demand for guarantees of long-term employment that loomed so large on the want lists of union
negotiators twenty-five years ago have been largely abandoned. Only a few sectors of the economy now offer as much job security as formerly, notably the
government service. But here, too, the passion for down-sizing has taken hold.
While outright dismissals of government employees are rare, the constriction of
job and promotion opportunities by leaving positions vacant and reduc-ing administrative levels is commonplace. The armed forces represent a particularly
interesting case. Soldiers were formerly of fered premiums for reenlisting when
their terms of service expired but in the past few years it has become routine to
deny reenlistment to soldiers with excellent records in order to reduce the size of
the armed forces and to impose involuntary retirement on officers with excellent
records for the same reason.
Given these circumstances, one would expect to find high unemployment in
the United States, or at least higher rates than those prevailing in national
economies that still offer a relatively high degree of job security. How does it
happen, then, that the latest U.S. rates are so low in relation to the French, German, and British rates and how, for that matter, do we explain the absence of
those inflationary pressures that economists unanimously predicted if unemployment in the U.S. should ever drop below 5 percent?1
To resolve these mysteries we need to look more attentively at the U.S. unemployment rate, understand how it is calculated, and see why it cannot be
safely compared with the rates of other countries unless a number of contextual
factors are taken into account. A national system of unemployment compensation was not introduced in the United States until 1935, much later than in the
three nations we are using for comparison. It was launched, not as a federal programme, but as a state programme mandated by the federal government. By
1937 all forty-eight states, the then territories of Alaska and Hawaii, and the
District of Columbia had passed the requisite laws. All contributions collected
by the states are deposited in an unemployment trust fund in the U.S. Treasury,
but each state maintains a separate account. A state may withdraw money from
its account only to pay unemployment benefits. Each state has independent responsibility for the content and development of its unemployment insurance
scheme. A network of joint federal/state bureaus called employment commissions administer unemployment benefits while acting as employment agencies
for those unemployed who receive insurance benefits and also for those, actually
a slight majority, who receive none. In order to be counted as unemployed,
workers must be ready, able, and willing to work, must be registered as
job-seekers with one of the employment commissions, and must accept suitable
work if offered. Elaborate rules govern the definition of suitable work and define eligibility. In the state of Virginia, for example, the applicant for unemployment benefits must have earned at least $2,850 over two quarters out of the
first four of the last five completed quarters. The maximum benefit payable is
$228 per week, a figure which if annualised would put most recipients below the
poverty line but, in fact, very few beneficiaries receive the maximum payment
and none for an entire year. The average weekly benefit is considerably lower
than the maximum and benefits for most recipients are limited to thirteen weeks.
They can be doubled to twenty-six weeks in cases of demonstrated hardship, but
not further extended. A good deal of paperwork must accompany the application. The recipient must submit to the employment commission during every
week in which he or she receives benefits a certified record of having applied
for work. The minimum is two serious contacts a week, and these records are
frequently checked. The system is self-supporting. Unlike other entitlements,
unemployment benefits are paid for entirely by a direct tax on employers and
employers are taxed in proportion to the number of their former employees who
apply for benefits.
The count of unemployed is not restricted to the people who manage to collect benefits under these rather stringent conditions, but it is limited to those
who are registered with the employment commissions as actively looking for
work and can demonstrate to the satisfaction of officials that they have been doing so in good faith. People who cease to search for jobs are no longer counted
as unemployed. Thus, in the U.S. statistics, long-term unemployment is not captured at all. It does not exist. Discouraged workers or those for whom there is no
plausible reemployment opportunity are likewise excluded from the count. Consequently, it may be fairly said that the U.S. rate understates unemployment in
comparison with the rates of most other countries, but that assertion remains essentially empty unless the particular rules of calculation that are used in a given
other country are taken into account. While most European countries are less restrictive than the U.S. in counting the unemployed, their calculation rules are far
from uniform among themselves.
Another factor affecting the comparability of the American rate with those of
other countries is the relatively large size of two groups who are not counted in
the labour force at all and thus necessarily excluded from any count of the unemployed. Somewhat more than two million men and women, mostly men, currently serve in the U.S. Armed Forces. Nearly two million men and women,
mostly men, are currently confined in U.S. prisons and jails. Both of these populations are much larger proportionately than the equivalent populations in other
advanced industrial nations. Such considerations do not deprive Figure 2 of informative value because the downward distortion to which the U.S. rate is subject has been in place for more than sixty years, and the changing relationship of
the U.S. trend to those of other countries is not much affected by the realisation
that comparison in absolute terms is difficult.
Even if the absolute level of the U. S. unemployment rate is questionable because of the omission of long-term unemployed and discouraged workers and
the exclusion of special populations, it is still very interesting to decompose the
general rate and examine various sub-populations. We noted, for example, that
within the past two decades white-collar workers have lost their former immunity to arbitrary dismissal. But it is equally important that blue-collar workers to-
day still experience about twice as much unemployment risk as white-collar
workers and that within the white-collar groups, sales and clerical personnel
have about twice the risk of managers. Education, race, and age generate other
differences. High school dropouts have about twice the risk of high school
graduates who in turn have about twice the risk of college graduates who in turn
have a significantly higher risk of unemployment than the holders of advanced
degrees. The higher educational qualifications come close to providing complete
immunity from unemployment. Age is a factor, as well. Men younger than
twenty-four have about twice the risk of unemployment of men over twenty-four, although a particular young man’s exposure to unemployment is strongly affected by school enrolment and school leaving and by his enlistment in or
discharge from the armed forces (Mare, Winship and Kubitschek, 1984). Women under twenty-four have about three times the risk of unemployment of older
women. That particular comparison is complicated by the circumstance that
women, although now constituting nearly half of the American labour force,
move in and out of the labour market much more frequently than men and that
the question of whether a given woman is unemployed or has merely returned to
household duties is often impossible to resolve. Marriage, like education, provides considerable protection against unemployment for both sexes. Race and
ethnicity are powerful factors. Blacks have nearly twice the unemployment risk
of whites. That gap has persisted with little change for many years (Sundstrom,
1997). Moreover, there is evidence that the impact of unemployment on family
stability, especially the risk of divorce or separation, is significantly greater in
black than in white families (Starkey, 1996). These sub-group differences are
cumulative so that, for example, white male college graduates at age forty-five
have an unemployment rate close to zero while black high school dropouts at
age nineteen have a rate close to 50 percent. The subject of differential unemployment risks has been well explored in a recent dissertation by Wang (1998)
and by Jencks (1991), Massey and Fenton (1993).
Social scientists have traditionally recognised four distinct types of unemployment: 1) frictional unemployment; 2) seasonal unemployment; 3) cyclical
unemployment; 4) structural unemployment.2. Given the way the U.S. system
works, each type impinges somewhat differently on the enumeration of unemployed persons.
Frictional unemployment occurs when workers change jobs. Even with a high
level of labour demand, the movement from one job to another takes time,
sometimes quite a lot of time when it involves retraining or migration from one
part of the country to another. Hence, even under the most favourable circumstances, there will always be a pool of workers in the process of changing jobs,
and in an economy where restructuring is almost continuous, that pool will be an
appreciable fraction of the labour force, perhaps as much as 2 percent.
Seasonal unemployment involves a considerable number of diverse occupations ranging from those of very low to very heigh occupational status. For example, the farm labourers who harvest crops are necessarily limited to a few
weeks in the working year if that is their sole occupation. Many such labourers
are imported from Mexico or Central America and return home after the harvest
season so that they cannot be counted as among the American unemployed. A
considerable number are legal residents and they can be counted if a) their earnings are sufficient to qualify for unemployment insurance or, b) they sign up to
search actively for employment in some other occupation. However, it appears
that most seasonal farm workers are never counted among the unemployed during their periods of inactivity if only because so many of them use the opportunity to become illegal residents instead of returning home and are likely to stay
clear of official agencies for some time thereafter. At the other end of the scale,
established film actors who may work only a few weeks in the year, have no
motive to register as unemployed since they seek employment through quite different channels than those offered by the employment commissions and are not
attracted by the stingy benefits of unemployment insurance. By contrast, less established actors often depend on unemployment insurance to carry them from
job to job. The relatively short benefit period fits their pattern of intermittent
employment very well. The same is true of many of seasonal employments in
summer or winter resorts and in occupations like logging and rodeo riding that
can only be pursued in certain seasons.
Cyclical unemployment is of course what produced the enormous peaks displayed by the unemployment rate in the 1930s and most of the lesser peaks and
valleys since. There can be no question that the severity of these employment
cycles has been lessening, as Figure 2 plainly shows. The United States experienced its most recent surge of cyclical unemployment in 1982-83. Some economists believe that sophisticated fiscal policy has permanently damped down the
wild swings of the business cycle. Other economists regard that optimistic view
as nonsense. Only time can resolve the question.
Structural unemployment is what seems to be afflicting the major European
economies in the past few years (ILO 1996) and perhaps, in a more hidden form,
the U.S. economy as well. Structural unemployment involves one or more of the
following conditions:
1) There are particular sectors of the labour market from which workers cannot easily move into other jobs. In the early 1980s, for example, the so-called
rust belt of heavy industrial districts stretching from Pennsylvania to Illinois
suffered a far more serious recession than the rest of the United States and it was
particularly characterised by the plight of skilled workers in steel mills and
manufacturing plants who could not easily transfer their skills to other kinds of
work. A similar problem afflicted the Texas oil fields in the early 1990s and
again today.
2) In some sectors with diminishing employment the number of vacancies
continues to shrink in relation to the number of job seekers. A notable case extending over two decades has been the decline of employment in the U.S. merchant marine, occasioned by the inability of American ship owners to compete
against foreign flag vessels subject to lower taxes, lower wages, and more accommodating safety regulations. As the number of jobs for American seaman
and sea officers shrank, elaborate measures were introduced to spread the avail-
able employment opportunities by, for example, requiring seamen to remain on
the beach for the same length of time as their previous sea-going assignment.
But as the number of openings continued to decline, most members of this
workforce with their specialised skills and long experience, were forced into
other lines of work or into long-term unemployment.
3) Technological change, in a highly modernised economy, continuously
renders certain types of skill obsolete and requires the holders of those skills to
seek other work. But in innumerable instances, the highly skilled worker whose
occupation disappears is unlikely to find a substitute occupation that offers
equivalent pay and benefits. The union printers are a case in point. Not very long
ago they were the aristocrats of blue-collar labour with a powerful union, highly
protective work rules, and a strong apprenticeship system. The advent of computerised composition made the linotype machine as obsolete as the spinning
wheel and did so almost overnight. Many of the older union printers took early
retirement and were never counted among the unemployed. Most of the younger
printers eventually found other lines of work and they, too, are not counted although they may reasonably regard themselves as victims of structural unemployment.
The more flexible the economy and the greater the rate of technological innovation, the more structural unemployment will develop and be concealed. The
net effect is both good and bad. On the one hand the economy becomes more
productive. On the other hand the distribution of earnings becomes more unequal. This brings us to globalisation, the last element in the equation. Globalisation puts the worker in advanced economies in direct competition with workers
in less developed economies who demand and obtain much lower wages per unit
of output. Within the last ten or fifteen years, entire industries have migrated out
of the United States to low-wage regions in Asia and Latin America. Very little
clothing of any kind is still manufactured in the U.S. Furniture, toys, kitchen
ware, farm machinery, household appliances, electronic components that were
formerly mass-produced in the U.S. are now manufactured abroad and returned
for sale in the American market. The positive consequence is that ordinary consumer goods are much cheaper than they would otherwise be. And from the
standpoint of the managers of enterprises, globalisation has an even more important favourable effect. It enables the U.S. economy to maintain a low level of
unemployment without generating any inflationary pressure. In other words, the
scarcity of job applicants in the domestic market does not induce a demand for
higher wages because of the ease with which jobs can be shifted overseas. The
negative aspects of this situation are equally apparent. While there is no lack of
employment opportunities, average earnings in the U.S. have lagged conspicuously behind rising productivity and continue to do so. McGhee (1996) writes
that, “in spite of a prosperous economy, Americans are experiencing the greatest
sense of job insecurity since the Great Depression” because of several kinds of
structural unemployment.
Thus, we confront the paradox that while the current U.S. economy delights
Wall Street and Washington because it combines low unemployment and low
inflation, it nevertheless leaves a larger proportion of the national population in
abject poverty and a wider gap between the earnings of managers and workers
than that of any other advanced economy.
NOTES
1
For sophisticated analyses of the long-term relationship between wage-inflation
and unemployment, see Hyclak and Johnes 1997 and Volgy, Schwarz and
Imwalle 1996.
2
For an old but excellent description of these types, see Gordon 1965.
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