Saturday, March 6, 2010

Unemployment and Economic Growth

Those of you teaching AP Macro either already have arrived or soon will be at the chapter on unemployment. And the chapter on economic is probably in your rear view mirror. However, when you get to unemployment, you probably will spend some time discussing the relationship between economic growth and unemployment, specifically structural unemployment.

Joseph Schumpeter called economic growth creative destruction. He pointed out that a growing, changing economy is constantly creating new products and new methods of producing products while destroying others. The destruction of old products and methods results in lost jobs that never come back.

National Public Radio has an excellent photographic essay (A photographic essay on a radio web site?) showing jobs that have been eliminated. (HT to Cafe Hayek.) One of my favorites was the photo of the pinsetters in a bowling alley. When I was growing up, my elementary school had a four-lane bowling alley in the basement. The church, of which my school was a part, had several small leagues that used the alley on a regular basis, and one of my first jobs was as a pinsetter. Our lanes actually had machines that dropped the pins, but after each ball, the setter had to jump into "the pit", put the ball on the rails that returned it to the bowler, and pick up the pins that were knocked down on that roll and place them in the machine for the next drop. It was hectic and you knew you had become a "master" when you could handle two lanes at once. For this workout you got a straight rate per bowler, per game and half-off the price of a bottle of soda.

We don't see pinsetters very often. Heck, in modern bowling alleys you don't even have to know how to score. Times change, jobs change, and unemployment often reflects these changes. It doesn't make it easier for those who suffer, but it should shape how we approach unemployment.

Just as a follow-up to the NPR piece, there is an engaging but somewhat dated annual report from the Federal Reserve Bank of Dallas (1992) that examines "creative destruction" and even has tables showing jobs that exist in 1991 that didn't exist earlier in the century. You might want to share some of it with your students when talking about the concept of unemployment.

Please share your comments.

5 comments:

Julie said...

Thank you for the reference. I love the pinsetter story--and yes I remember!
I ask the kids what entire industry was eliminated in the mid-late 70's as a result of the calculator becoming cheap enough for everyone? It takes them awhile, and many have never seen one. If their father is an engineer and studied in the 70's , they've heard about the slide rule.
I will add the pinsetter example--the kids won't believe it!
Happy Spring!

Pete Murphy said...

Unemployment, both in the U.S. and the world as a whole, marches ever higher because the field of economics doesn't account for the relationship between population density and per capita consumption.

Following the beating the field of economics took over the seeming failure of Malthus' theory about overpopulation, economists adamantly refuse to ever again consider the effects of population growth. If they did, they might come to understand that once an optimum population density is breached, further over-crowding begins to erode per capita consumption and, consequently, per capita employment.

And these effects of an excessive population density are actually imported when a nation like the U.S. attempts to trade freely with other nations much more densely populated - nations like China, Japan, Germany, Korea and a host of others. The result is an automatic trade deficit and loss of jobs - tantamount to economic suicide.

Using 2006 data, an in-depth analysis reveals that, of our top twenty per capita trade deficits in manufactured goods (the trade deficit divided by the population of the country in question), eighteen are with nations much more densely populated than our own. Even more revealing, if the nations of the world are divided equally around the median population density, the U.S. had a trade surplus in manufactured goods of $17 billion with the half of nations below the median population density. With the half above the median, we had a $480 billion deficit!

If you‘re interested in learning more about this important new economic theory, then I invite you to visit my web site at http://PeteMurphy.wordpress.com.

Pete Murphy
Author, "Five Short Blasts"

Yadira said...

Mr.Laurdsen at my high school introduced this concept to the class last Friday. He mentioned self-checkout machines at grocery stores. I did not think that new technology, such as machines, could cause a great change in the economy. Your bowling story reinforced Mr. Laurdsen's lesson. Then after thinking it through I realized that I also noticed self-checkout machines at our library. Also, at factories and companies they are investing in equipment that can replace workers. This means a lot of people are getting replaced with machines. In effect the unemployment rate should increase. On the other side I think this could be positive for two reasons. People need to someday get employed to fix the machines. Also, the people who have been replaced with machines can look for jobs that can contribute to the economy in a more positive way.

Tim Schilling said...

Yadira,

Thanks for your comment. You've hit on an important point. Technology doesn't just cost jobs, it creates jobs.

But we also need to remember that it improves life by making it easier for more people. Economist Joseph Schumpeter called it "creative destruction." I'm sure your teacher will talk about the concept, if he hasn't already.

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