At one time or another, all market economies must cope with the problem of unemployment, but it can become particularly acute in societies undergoing the difficult transition from a central, government-controlled economy to a free-market system. While lifting government price controls allows supply and demand -- the engines of all market economies -- to function unimpeded, it can also cause a short-term loss of jobs.
With the end of price controls, consumer demand, not government quotas, dictates the variety of goods offered for sale. As the winds of competition begin to blow through the economy, they force inefficient businesses to close or to cut the number of their employees so that the businesses can survive. The result is an increase in unemployment as companies struggle to contain their costs. Cut off from government subsidies, many businesses, including large state-owned enterprises that employ large numbers of people, simply cannot survive in this new economic world.
But with the pain of unemployment comes the benefits of freeing prices and establishing private property and enterprise as the economic basis of the society. Entrepreneurs, seeing opportunities for new business ventures, hire workers and produce new goods and services. Foreign and domestic businesses seek opportunities for profitable investments. Not only does the number of job opportunities increase, but as new businesses proliferate, so does their diversity, increasing job flexibility and choice for workers.
In many instances, the distinction between worker and entrepreneur may blur, as individuals learn skills with one company then leave to establish their own companies to provide new, better, or cheaper products in the same field. The rate of unemployment, as with inflation, drops over time with the establishment of a growing, dynamic, and flexible market economy.
But unemployment by no means disappears, even in prosperous, well-established market economies. In a market economy, some workers are always changing jobs or waiting to take their first job after entering the labor market. This is known as frictional unemployment, and in many respects simply reflects the freedom and mobility workers have to look for jobs that offer the best pay and highest overall satisfaction. Indeed, if workers were not free to move around this way -- which as a consequence generates a certain level of unemployment -- both competition and production would be lessened.
Because frictionally unemployed workers usually aren't unemployed very long, and because they voluntarily chose to change jobs or undertake training, frictional unemployment is not, by and large, seen as a serious problem for a market economy. In practice, a certain percentage of the labor force in most nations with a mobile work force will be frictionally unemployed at any given time, and economists generally classify such economies as fully employed.
Unfortunately, two other kinds of unemployment are not so benign: cyclical and structural unemployment. Cyclical unemployment occurs when the level of spending and production in an economy falls off and nations enter a period of recession or depression. Higher unemployment levels are, in fact, one of the key measures of the severity of these downturns. At the lowest point of the Great Depression, for example, 25 percent of the labor force in Europe and the United States was unemployed. This is the kind of unemployment that a nation's monetary and fiscal policies are especially designed to fight. (See "Government in a Market Economy.")
Structural unemployment affects workers who do not have the education, training, or job experience necessary to remain employed in today's economy. For example, many jobs require high skill levels or the ability to learn new procedures and techniques quickly from technical manuals and short training sessions. Similarly, job opportunities in what has been called the information age require certain levels of education and proficiency in communication, language, science, and management.
Although structural unemployment usually affects only a small percentage of workers in an economy at any given time, dealing with this problem can be slow and expensive -- and offers one more reason why a nation's educational program is critical to economic growth and opportunity.
The social costs of unemployment are often measured in terms of the output of goods and services that don't get produced when some workers don't have jobs. That is a serious cost because lost production is normally lost forever and can't be made up. But the personal costs of unemployment can be even more serious and devastating to workers and their families: lost income and savings are almost inevitable, and in some cases cars and homes are also lost, leading to anxiety, psychological depression, family conflict, and sometimes even crime. For all of these reasons, governments in virtually all market economies provide unemployment benefits to unemployed workers for varying periods, as well as many kinds of training programs.
Despite these undeniably serious problems, it would be a mistake to think that unemployment is a problem that most workers have to worry about most of the time in a market economy. In virtually every year since the 1930s, for example, the vast majority of all of the unemployment in nations such as the United States has been frictional unemployment, not cyclical or structural. And most workers who are unemployed don't stay that way very long.
In the United States, for example, about 70 percent of layoffs involve workers who are only temporarily unemployed and return to work for their previous employer. And about half of these people who are unemployed in any particular month are employed just one month later. With competitive labor markets, laid-off workers have other job opportunities or can pursue additional training. Many firms in market economies try to hold on to their workers even during times of slow sales and production, because they do not want to lose them to other competitive firms or have to train new prospects when demand again expands.