Unemployment in the US
The period of 1970s was a hard one for the US. Never before the country had experienced the harsh combination of inflation, recession and unemployment. The latter was especially hard for the country to survive, as it undermined the economic welfare of the nation. The main reasons of unemployment was Government severe intervention into the economic processes. It is important to notice that 1970s were marked with two distinct features that impacted the US economy greatly: • Vietnam War; • Oil embargo levied by OPEC.
The former stipulated the inflation in the country made purchasing power of the people equal zero. Obviously, high prices indicated that Americans were unable to buy as many products as they could before. The oil embargo made petroleum prices rise enormously and thus worsened the situation with inflation to a deeper level. The interdependence between inflation due to consumer price index rise and unemployment is clear: people are unable to buy products for such high prices, consequently demand falls.
As the result, the production capacities are not fully working, many people thus lose their jobs on one hand. On the other hand, new productions are not opening, because there is no necessity. Therefore, new workplaces are not being created, which enhances the unemployment rate. Thus, it is possible to say that 1970s were marked by so-called cyclical unemployment. The latter arises as the result of the lack of aggregate demand. In the case of high unemployment rate, as it was in the US during 1970s, there are two
possible strategies that Government might take in order to fix the situation: • Monetarist approach; • Keynesian approach. Cyclical unemployment is crucial, because it can affect the structural one (occurs when workers are unable to fill available jobs because they lack the skills, don’t like the available jobs or are unwilling to work under the wage rate offered in the market). The interdependence is very simple: the economic activity cycles usually match the goods/service market changes. If it’s downturn, certain industries become stagnant.
The labor force working in them is not needed anymore. The restructuring in economic sectors takes place. Cyclical unemployment can be managed by smart monetary and fiscal policy without generating rising inflation. It means that the Government should use the monetarist approach and doesn’t intervene too much. The functions of Government are limited to maintaining the balance between the amount of money circulating in the economy and the amount of products (MV=PQ), where M is the amount of money.
Yet, during 1970s the Government undertook another policy – Keynesian one, trying to affect the unemployment rate in so-called “hand” regime, setting minimum wages policies and establishing unemployment compensation. The minimum wage policy impacted entrepreneurs as they couldn’t afford paying the wages necessary. Thus, they lost motivation to expand and create new workplaces. Unemployment compensations, in turn, undermined the stimuli of people to search for a job. In such a way, the demand management failed cause more people were losing their jobs, meaning the decrease of personal income and, as the result, the decrease of aggregate demand.
(Gallaway, Vedder, 1993) To conclude, it is important to say that 1970s was the time of cyclical unemployment. The latter was treated in a hand regime using demand rather than supply management. Keynesian approach thus failed, having showed the ineffectiveness of Government intervention into the economy.
1. Gallaway L. , Vedder K. (1993) “Out of Work: Unemployment and Government in Twentieth-Century America” Holmes & Meier, New York 2. Sims R. (2002) “Managing Organizational Behavior” Quorum Books, Westport, CT