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Cyclical unemployment occurs when the economy goes into a recession. The basic causes of cyclical unemployment are decreases in the levels of consumption, investment, or government spending in the economy, or a decrease in the demand for goods and services exported to other countries. As national spending and production levels fall, some employers begin to lay off workers. Cyclical unemployment varies greatly according to the health of the economy. Some of the highest unemployment rates for the last decades of the 20th century took place during the recession of 1982 to 1983, when unemployment levels reached almost 10 percent. The highest U.S. unemployment rate of the 20th century occurred in 1933, when the Great Depression left almost 25 percent of the labor force without work.

Sometimes the government can use monetary or fiscal policies to increase spending by businesses and households, for instance by cutting taxes. Or the government can increase its own spending to fight this kind of unemployment. . Perhaps the most famous example of this kind of tax cut in the United States was the one designed in 1963 and passed in 1964 by the administrations of U.S. president John F. Kennedy and his successor,
Lyndon B. Johnson.

Structural unemployment occurs when people who are looking for jobs do not have the education or skills to fill the jobs that are currently available. Most policies designed to reduce structural unemployment provide training programs for these workers, or subsidize education and training programs available from colleges and universities, technical schools, or businesses. In some cases, the government provides support for retraining when increased competition from imported goods and services puts U.S. workers out of work or when factories are shut down because production is moved to another state or country.

Unemployment rates also vary sharply by occupation and educational levels. As a group, workers with college degrees experience far lower unemployment rates than workers with less education. In 1998 the unemployment rate for U.S. workers who had not graduated from high school was 7.1 percent; for high school graduates, the rate was 4.0 percent; for those with some college the rate was 3.0 percent; and for college graduates the unemployment rate was only 1.8 percent.

Income Inequality

Another issue involving the operation of labor markets in the U.S. economy has been the growing difference between the earnings of high- income and low-income workers at the end of the 20th century. From 1977 to 1997, families who make up the top 20 percent of income groups have seen their money income rise from 40.9 percent of the national income to
47.2 percent. Over the same period, families in the lowest 20 percent of income groups have experienced a decline from 5.5 percent of the national income to 4.2 percent. This trend is the result of several factors.

Wages for skilled workers, those with more education and training, have increased quickly because the supply of these workers in the U.S. has not risen as quickly as demand for these workers. In addition, wages for unskilled labor in the United States have been held down more than in other nations as a result of U.S. immigration policies. The United States has admitted a larger number of unskilled workers than other industrialized nations. Other countries often consider job market factors more heavily in determining who will be allowed to immigrate. As a result, the supply of unskilled workers in the United States has increased faster than in other countries, pushing wages in low-paying jobs lower.

Finally, government assistance programs for low-income families tend to be more extensive and generous in other industrialized market economies than they are in the United States. That is perhaps one of the reasons that workers in those countries are less willing to accept jobs that pay lower wages, and why unemployment rates in those countries are substantially higher than they are in the United States. The exact relationship between those factors has not been determined, however.

It is clear that it has become increasingly difficult for U.S. workers who have not at least completed high school to achieve a high or moderate level of income. In 1996 the average annual income for graduates of four- year colleges was $63,127 for males and $41,339 for females, while the average annual income for those who did not graduate from high school was only $25,283 for males and $17,313 for females.

GOVERNMENT AND THE ECONOMY

Although the market system in the United States relies on private ownership and decentralized decision-making by households and privately owned businesses, the government does perform important economic functions. The government passes and enforces laws that protect the property rights of individuals and businesses. It restricts economic activities that are considered unfair or socially unacceptable.

In addition, government programs regulate safety in products and in the workplace, provide national defense, and provide public assistance to some members of society coping with economic hardship. There are some products that must be provided to households and firms by the government because they cannot be produced profitably by private firms. For example, the government funds the construction of interstate highways, and operates vaccination programs to maintain public health. Local governments operate public elementary and secondary schools to ensure that as many children as possible will receive an education, even when their parents are unable to afford private schools.

Other kinds of goods and services (such as health care and higher education) are produced and consumed in private markets, but the government attempts to increase the amount of these products available in the economy. For yet other goods and services, the government acts to decrease the amount produced and consumed; these include alcohol, tobacco, and products that create high levels of pollution. These special cases where markets fail to produce the right amount of certain goods and services mean that the government has a large and important role to play in adjusting some production patterns in the U.S. economy. But economists and other analysts have also found special reasons why government policies and programs often fail, too.

At the most basic level, the government makes it possible for markets to function more efficiently by clearly defining and enforcing people’s property or ownership rights to resources and by providing a stable currency and a central banking system (the Federal Reserve System in the
U.S. economy). Even these basic functions require a wide range of government programs and employees. For example, the government maintains offices for recording deeds to property, courts to interpret contracts and resolve disputes over property rights, and police and other law enforcement agencies to prevent or punish theft and fraud. The Treasury
Department issues currency and coins and handles the government’s revenues and expenditures. And as we have seen, the Federal Reserve
System controls the nation’s supply of money and availability of credit.
To perform these basic functions, the government must be able to shift resources from private to public uses. It does this mainly through taxes, but also with user fees for some services (such as admission fees to national parks), and by borrowing money when it issues government bonds.

In the U.S. economy, private markets are generally used to allocate basic products such as food, housing, and clothing. Most economists—and most
Americans—widely accept that competitive markets perform these functions most efficiently. One role of government is to maintain competition in these markets so that they will continue to operate efficiently. In other areas, however, markets are not allowed to operate because other considerations have been deemed more important than economic efficiency.
In these cases, the government has declared certain practices illegal.
For example, in the United States people are not free to buy and sell votes in political elections. Instead, the political system is based on the democratic rule of “one person, one vote.” It is also illegal to buy and sell many kinds of drugs. After the Civil War (1861-1865) the
Constitution was amended to make slavery illegal, resulting in a major change in the structure of U.S. society and the economy.

In other cases, the government allows private markets to operate, but regulates them. For example, the government makes laws and regulations concerning product safety. Some of these laws and regulations prohibit the use of highly flammable material in the manufacture of children’s clothing. Other regulations call for government inspection of food products, and still others require extensive government review and approval of potential prescription drugs.

In still other situations, the government determines that private markets result in too much production and consumption of some goods, such as alcohol, tobacco, and products that contribute to environmental pollution. The government is also concerned when markets provide too little of other products, such as vaccinations that prevent contagious diseases. The government can use its spending and taxing authority to change the level of production and consumption of these products, for example, by subsidizing vaccinations.

Even the staunchest supporters of private markets have recognized a role for the government to provide a safety net of support for U.S. citizens.
This support includes providing income, housing, food, and medicine for those who cannot provide a basic standard of living for themselves or their families.

Because the federal government has become such a large part of the U.S. economy over the past century, it sometimes tries to reduce levels of unemployment or inflation by changing its overall level of spending and taxes. This is done with an eye to the monetary policies carried out by the Federal Reserve System, which also have an effect on the national rates of inflation, unemployment, and economic growth. The Federal
Reserve System itself is chartered by federal legislation, and the president of the United States appoints board members of the Federal
Reserve, with the approval of the U.S. Senate. However, the private banks that belong to the system own the Federal Reserve, and its policy and operational decisions are made independently of Congress and the president.

Correcting Market Failures

The government attempts to adjust the production and consumption of particular goods and services where private markets fail to produce efficient levels of output for those products. The two major examples of these market failures are what economists call public goods and external benefits or costs.

Providing Public Goods

Private markets do not provide some essential goods and services, such as national defense. Because national defense is so important to the nation’s existence, the government steps in and entirely funds and administers this product.

Public goods differ from private goods in two key respects. First, a public good can be used by one person without reducing the amount available for others to use. This is known as shared consumption. An example of a public good that has this characteristic is a spraying or fogging program to kill mosquitoes. The spraying reduces the number of mosquitoes for all of the people who live in an area, not just for one person or family. The opposite occurs in the consumption of private goods. When one person consumes a private good, other people cannot use the product. This is known as rival consumption. A good example of rival consumption is a hamburger. If someone else eats the sandwich, you cannot.

The second key characteristic of public goods is called the nonexclusion principle: It is not possible to prevent people from using a public good, regardless of whether they have paid for it. For example, a visitor to a town who does not pay taxes in that community will still benefit from the town’s mosquito-spraying program. With private goods, like a hamburger, when you pay for the hamburger, you get to eat it or decide who does.
Someone who does not pay does not get the hamburger.

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