The bad press unemployment receives largely derives from its economic, social, and psychic costs, while its allocative and disciplinary benefits go largely unpublicized.
Frictional unemployment yields allocative benefits by matching workers and jobs. Finding a new job tends to be easier if you are not working full-time. At the same time, pools of idle labor allow firms to screen more potential employees than if unemployment were zero. The process of firms seeking suitable help while the unemployed seek jobs represents investment in labor market information. Lower transaction costs enhance economic efficiency. Unemployment also prompts some workers to return to school or to acquire skills through on-the-job apprenticeships.
Some critics cite unemployment as an evil unique to capitalism. Unemployment was unacceptable when the tenets of Marxism ruled Eastern Europe, but guarantees of jobs at all times for all citizens resulted in overstaffing and artificial work for many. For example, rest room attendants who sold tickets and toilet paper have been fixtures in Eastern European railway stations for generations, but their pay typically exceeds their receipts. (Siberia once beckoned Soviet citizens who objected to meaningless work.) Under central planning, quotas set for managers of state-run factories rarely specified costs—meeting production quotas was all that mattered. One result was that, under the old system, factory managers often stock-piled workers.
Reform force managers to try to minimize all costs, and massive lay-offs in Russia and eastern Europe during 1990-1993 seem to signal growing acceptance that unemployment can improve allocation by shifting resources to more valuable uses. Predictably, however, there has been a backlash. Many people in previously socialist countries resist reforms because of the widespread unemployment accompanying conversion from obsolete factory systems to modern industrialization. This modernization should, however, ultimately boost production and income for almost everyone.
We all know people who fail to pull their own weight—embellishing their own contributions and making unwarranted demands for wages, vacations, and other perks. Co-workers often describe them as "deadwood." Some economists view possible layoffs as curbs to undue demands for wages and fringe benefits. Threats of unemployment are also powerful work incentives for people who respond better to sticks than to carrots. These disciplinary benefits accrue, in the forms of lower costs and prices, to firms (and consumers) when there is slack in the labor market and threats of layoffs loom.
Evidence that the costs of unemployment generally outweigh its benefits includes the emphasis policymakers devote to curing it. Excessive unemployment has sounded the death knell at the polls for numerous political incumbents. Unemployment statistics based on surveys only crudely measure real (conceptual) unemployment, but they help gauge the success of government policy. And differentiating between types of unemployment helps in tailoring policies to attack the types that are especially troublesome—structural, cyclical, and induced.
One lesson is that achieving the goals of macroeconomic policy—full employment, price level stability, and economic growth—may be extremely difficult.