Policy Analysis No. 4

Unemployment: Causes and Cures

By Farrell E. Block
October 10, 1981

Executive Summary

At the end of 1980, 7.4 percent of the U. S. civilian labor force, about 7.8 million potential workers, was unemployed. Eight-hundred thousand of these had quit their last jobs, 4.2 million were laid off or discharged, and the remaining 2.7 million were new or returning participants in the labor force who had not yet found jobs. (1) About a million more persons were interested in and available for work but were not seeking jobs actively enough to be counted among the labor force. (2)

Because the percentage of those in the labor force with jobs is well below “full employment” levels (3), and because wages and salaries are the primary source of income for most Americans, unemployment deserves a high priority position on the policy maker’s agenda.

Policies affecting unemployment are not limited to those directed at unemployment. Indeed, perhaps the major contribution economists can make to public policy discussion is an explanation of the indirect and less obvious effects on unemployment of various policies. Economists can also demonstrate the trade-offs inherent in policy options, emphasizing that the achievement of one goal will often frustrate the achievement of another. These trade-offs reflect the inescapable economic fact that we can’t have our cake and eat it too, or as economists are fond of saying, “There is no such thing as a free lunch.”

The purpose of the discussion below is to point out the overall effects and inherent trade-offs of policies affecting unemployment. Knowledge of the effects and trade-offs of policies makes possible reasoned discussion and choices among various policy options.

Because a healthy economy providing jobs for all who want to work is the best unemployment antidote, the discussion begins with an analysis of economic growth. Other unemployment policies can be best studied by examining incentives — those of employers to provide jobs and those of potential employees to look for jobs. Finally, it is important to study the overall effects of policies designed specifically to reduce unemployment.

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Farrell E. Block is a senior partner at Econometric Research, Inc., of Washington, D.C.