Labor Issues and Effects on Economy Past and Present

Unemployment and Labor Issues in the U.S.A Economy

Unemployment and labour issues in the United States of America has significantly affected the economy of the United States. In January 2005, for example, the rate of unemployment rose by 0.2 percent to 5.4 percent (The Heritage Foundation, 2005). Increasing unemployment rates causes various effects on the U.S. economy. Some of the effects that unemployment has on the economy are described under the following subtitles.

Effects to the Economy of U.S.A

The current economy of the United States of America is characterized by high rates of unemployment. According to relevant sources, the unemployment rate in the United States has been on the rise; for instance, an employment rate of 9.1 percent was reported in the month of May 2011 (The Heritage Foundation, 2005).

Although the economy has regained growth since the 2008 global recession, unemployment rates have remained high due to a weak economy. According to relevant sources, many of the unemployed people in the United States have stayed out of employment for more than six months (The Heritage Foundation, 2005).

As stated by many economists, an all time high level of employment results in high costs of living to individual citizens and families. Moreover, the effect is felt by local and regional economies and the economy as a whole. The economic costs associated with unemployment will influence the strength of the economy in a significant way. In the subtitles that follow, the effects of high unemployment rates in the United States are discussed.

Loss of Potential National Output

Generally, high rates of unemployment lead to wastage of scarce economic resources. As a result, the overall growth potential of an economy is reduced by distinct margins depending on the severity. According to economists, an economy characterised by high unemployment produces within its production possibility frontier.

As such, there is no recovery for the hours the unemployed people are not working. However, a reduction in the rate of unemployment leads to an increased national output; thus, triggers improvement in the economic welfare.

During the third quarter of 2008, the GDP of the United States dropped by 0.5 percent. As a consequence, organizations and many businesses resorted to cutting their spending budgets in every way possible. Since human capital accounts for the highest cost of overheads, organizations started cutting their budgets through layoffs.

However, downsizing of businesses resulted in further negative GDP because layoffs reduce the organizations size and its potential output. As a result of this, potential GDP lost resulted in additional loss of job opportunities. With the reduction in the total GDP, the United States economy has been weakening over the years.

Fiscal Costs to the Government

A high rate of unemployment is unhealthy to an economy because it results in increased government expenditures, government borrowing and taxation. Also, when people remain unemployed, they mostly rely on welfare benefits despite the fact they do not pay taxes. This means that the government receives lower tax revenues while its expenditure on welfare benefits for families with no employment increases.

Furthermore, the unemployed people will tend to spend less due to limited funds and in the long run, their contribution to the economy in terms of indirect taxes reduces. Therefore, the government will be exposed to a gradual increase in the level of expenditure with a continuous reduction in tax revenues. The trend weakens the economy and may result in further job losses and higher government borrowing to support the economy.

As a matter of fact, the New Tax Bill has many implications in the economy of the United States of America. Despite the fact that it is difficult to secure an employment with the current state of the economy, the New Tax Bill guarantees unemployed workers 99 weeks of unemployment benefits.

Considering that 10% of the population has stayed out of employment for close to two years, the situation is very worrying for the nation. Furthermore, the increased government spending and reduction in revenues has weakened the economy and may result in closure of companies big employers. This can result in negative multiplier effects on the regional and local economy of the United States.

Over the years, constant loss in well paid jobs has led to reduction in the demand for local services, influenced development of negative pressure on house prices, and further loss of employment opportunities. As such, consumer spending has significantly reduced because the unemployed have limited funds to spend on luxury goods.

Loss of Investment in Human Capital

Long-term unemployment increases wastage of scarce resources which is usually set aside for training workers. Also, the unemployed people are affected because they lose the long earned skills attained in the changing job market. As such, their chances of securing new employment in the future reduce. In its plans to create more job opportunities, the United States government will have to spend extra in additional job training. Unemployment will also result in loss of income by the affected; thus, impacts their spending ability. As a result, most of the affected people experience a decline in their ability to repay loans and their living standards deteriorates.

How Leaders handled Labor Issues in the Economy

During the progressive era (1900 – WWI), the main distinguishing factor with the current economy was the need for reform during that period. “America directed its full attention to the problems resulting from industrialization and urban growth” (Henretta & David, 2010). Progressivism was realized at the national level with the election of Theodore Roosevelt as the president of the United States.

In the late 19th century, America emerged as a Great Power ranking with the European powers with respect to economic standards. However, economic growth forced America to search for outlets for its surplus products (Henretta & David, 2010). This led to the need for more labor, thereby, creating labor related issues in the long run.

In order to counteract the effects of labour issues in the United States, earlier presidents employed various tactics as their solutions. However, earlier presidents had a major task in dealing with the consequences of high unemployment rates. As described below, presidents who had high unemployment rates experienced difficulties in securing their second terms in office (ABC NEWS, 2011):

George Bush (unemployment rate of 7.4%) was defeated by Bill Clinton in 1992.
Ronald Regan (unemployment rate of 7.5%) was defeated by Jimmy Carter in 1980.
Gerald Ford (unemployment rate of 7.8%) was defeated by Carter in 1992.

Some of the tactics used to solve labour problems are discussed under the following subtitles.

Enactment of Unemployment Laws and Policies

In 1935, the 32nd president of the U.S (Franklin Delano Roosevelt) encouraged deficit spending through advocating for formulation of New Deal Policies by the Supreme Court (Spark Notes, 2011). The National recovery Act was enacted shortly before it was ruled out as being unconstitutional because it vested too much power in the president. However, the president started scaling back deficit spending resulting in a second recession.

As a result of the Great Depression between 1930 and 1941, the need for establishment of a bill that protects U.S.A citizens’ employment arose. During this 12 year Depression era, a large percentage of approximately 17.1% of all workers were unemployed (Coalition for Economic and Social Justice, 2008). This meant that the economic capacity of the nation remained idle for the whole duration. The long-term unemployment resulted in the creation of the Full Employment Bill of 1946.

The bill was established with the main aim of ensuring employment is provided to the last potential worker among the Citizens of the United States (NPR, 2011). Below are some effects of the Great Depression (1929-1933) in the United States (Effects of the Great Depression, 2011):

In 1933, the level of industrial production decreased by a huge 46 percent.
Between 1929 and 1933, the United States GNP dropped to 56 billion dollars (1.85 times) from a high of 103.9 million dollars.
As a result, the rate of unemployment increased from 3.2 percent to 25 percent in the year 1933. “This amounted to approximately 12.8 million in unemployed U.S citizens” (Effects of the Great Depression, 2011).
About 135,000 companies and financial institutions collapsed resulting in 60 percent reduction in corporate earnings (Effects of the Great Depression, 2011).

As a result of the depression, Franklin D. Roosevelt signed a new deal to assist in the recovery of the economy. “In his deal, he proposed for creation of new job opportunities such as painting of the post office and cleaning of the streets” (Effects of the Great Depression, 2011).

Stimulus Packages to Revive Economy

After the 2008 Global recession, the rate of unemployment was high and more people were in the verge of loosing their employment. As a way of reducing the unemployment, president Barrack Obama introduced the Recovery Act funding that was released to boost the economy. The plan involved distribution of large sums of money into the economy that would help in the creation of new job opportunities and increase the living standards of United States Citizens. These plans quickly led to a wave of positive effects within the economy as described below:

More job opportunities were created and companies started gaining positive growth. Currently, the rate of unemployment in the United States has dropped from 9.0 percent to 8.9 percent since the 2008 financial crisis.
Auto manufacturers started creating contract jobs for employees in order to increase their flexibility. For instance, Chrysler auto manufacturer increased its U.S. contract labour by approximately 150 percent.
The state of employment in the United States has improved significantly with indication of more future growth.


In conclusion, it is inevitable to note that the long-term high rate of unemployment in the United States has impacted negatively on the economy. Unemployment has led to increased budget spending through increased welfare benefits for families with non working citizens.

Also, government revenue has decreased since the unemployed citizens do not pay tax and have lower spending, which, further decreases revenue from indirect taxes. Therefore, it is important for the government to come up with long-term plans and policies that would help revive the economy and create enough job opportunities for all Americans.


ABC NEWS 2011. Lesson for Obama: History Not Kind to Presidents with High Unemployment Rates. ABC News. survive-high-unemlpoyment-fdr-reelected-unemployment-2012/story?id=12806938 (Accessed June 17, 2011).

Coalition for Economic and Social Justice 2008. The Case for a Full Employment Policy. Jobs and Justice. (Accessed June 17, 2011).

Effects of the Great Depression 2011. Effects of the Great Depression. Jobs and Justice. (Accessed June 18, 2011).

Henretta, James A. and David Brody. America: A Concise History, Volume II: Since 1877. 4th ed., Boston: Bedford/St. Martin’s, 2010.

NPR 2011. The Nation: Zero Unemployment Possible? NPR. (Accessed June 17, 2011).

Spark Notes 2011. The Great Depression (1920-1940). Spark Notes. (Accessed June 17, 2011).

The Heritage Foundation 2005. Unemployment Rates of Modern Presidents. Heritage Foundation. (Accessed June 17, 2011).