What causes unemployment?

Unemployed men outside soup kitchen. Source: Wikipedia

The unemployment rate is falling. It’s down to 5%–half of what it was during the recession in 2009. Most economists consider 5% the natural rate of unemployment—the rate that accommodates a dynamic, changing economy, where employers hire and fire and where people change jobs. With the rate falling and wages rising, it looks like the Fed is about to raise interest rates for the first time in over 8 years.

Unemployment Rate. Source: Bureau of Labor Statistics

But what causes unemployment in the first place? That’s the question that vexed economist John Maynard Keynes in the ‘30s, and that prompted him to formulate his General Theory. He proposed that a decline in aggregate demand will lead to lower spending for new goods. Businesses will then lay off workers, since they don’t need to make as many goods. This is why we use monetary and fiscal policy today to try to jump-start the economy.

But the whole notion of unemployment is a modern invention. In the 18th and early 19th century, we had primarily an agrarian economy. The vast majority of the labor force worked on farms—and farmers always have more work to do. With the industrial revolution came factories, mills, and specialization. It was possible to get laid off from your job—the factory could close, or new technology could displace workers. That’s why the Luddites and Saboteurs tried to destroy the machinery that threatened their jobs. But the word “unemployment” doesn’t appear with any frequency in English literature until after 1900.

Word frequency. Source: Google Ngram Viewer

Of course, this may be an artifact of measurement. There has always been concern about the potential mischief that “idle hands” might create. But unemployment didn’t become an issue of public policy until the early 20th century.

Still, the Bureau of Labor Statistics was created in 1884—just as the labor movement was getting going. And it’s been estimated that unemployment hit 12% during the monetary depression of the 1890s. But it’s worth remembering that our notions of unemployment and under-employment are creations of a modern economy. As we enter the post-modern era, that could change.

Because there’s always more work to do. The question is, who will pay you to do it?

Douglas R. Tengdin, CFA

Chief Investment Officer

By |2017-07-17T12:22:20+00:00November 23rd, 2015|Global Market Update|0 Comments

About the Author:

Mr. Tengdin is the Chief Investment Officer at Charter Trust Company and author of “The Global Market Update”. The audio version of each post can be heard on radio stations throughout New England every weekday. Mr. Tengdin graduated from Dartmouth College, Magna Cum Laude. He received his Master of Arts from Trinity Divinity School, Magna Cum Laude and received his Chartered Financial Analyst (CFA) designation in 1992. Mr. Tengdin has been managing investment portfolios for over 30 years, working for Bank of Boston, State Street Global Advisors, Citibank – Tunisia, and Banknorth Group. Throughout his career, Mr. Tengdin has emphasized helping clients manage their financial risks in difficult environments where they can profit from investing in diverse assets in diverse settings. - Leave a comment if you have any questions—I read them all! - And Follow me on Twitter @GlobalMarketUpd

Leave A Comment