Статья: U.S. Economy

Статья: U.S. Economy

households, businesses, and government agencies pay their bills they use

checks, but for smaller purchases they also use currency or coins.

People can change the type of the money they hold by withdrawing funds from

their checking account to receive currency or coins, or by depositing

currency and coins in their checking accounts. But the money that people have

in their checking accounts is really just the balance in that account, and

most of those balances are never converted to currency or coins. Most people

deposit their paychecks and then write checks to pay most of their bills.

They only convert a small part of their pay to currency and coins. Strange as

it seems, therefore, most money in the U.S. economy is just the dollar amount

written on checks or showing in checking account balances. Sometimes,

economists also count money in savings accounts in broader measures of the

U.S. money supply, because it is easy and inexpensive to move money from

savings accounts to checking accounts.

Most people are surprised to learn that when banks make loans, the loans

create new money in the economy. As we’ve seen, banks earn profits by lending

out some of the money that people have deposited. A bank can make loans

safely because on most days, the amount some customers are depositing in the

bank is about the same amount that other customers are withdrawing. A bank

with many customers holding a lot of deposits can lend out a lot of money and

earn interest on those loans. But of course when that happens, the bank does

not subtract the amount it has loaned out from the accounts of the people who

deposited funds in savings and checking accounts. Instead, these depositors

still have the money in their accounts, but now the people and firms to whom

the bank has loaned money also have that money in their accounts to spend.

That means the total amount of money in the economy has increased. This

process is called fractional reserve banking, because after making loans the

bank retains only a fraction of its deposits as reserves. The bank really

could not pay all of its depositors without calling in the loans it has made.

It also means that money is created when banks make loans but destroyed when

loans are paid off.

At one time the dollar, like most other national currencies, was backed by a

specified quantity of gold or silver held by the federal government. At that

time, people could redeem their dollars for gold or silver. But in practice

paper currency is much easier to carry around than large amounts of gold or

silver. Therefore, most people have preferred to hold paper money or checking

balances, as long as paper currency and checks are accepted as payment for

goods and services and maintain their value in terms of the amount of goods

and services they can buy.

Eventually governments around the world also found it expensive to hold and

guard large quantities of gold or silver. As foreign trade grew, governments

found it especially difficult to transfer gold and silver to other countries

that decided to redeem paper money acquired through international trade.

They, too, changed to using paper currencies and writing checks against

deposits in accounts. In 1971 the United States suspended the international

payment of gold for U.S. currency. This action effectively ended the gold

standard, the name for this official link between the dollar and the price of

gold. Since then, there has been no official link between the dollar and a

set price for gold, or to the amount of gold or other precious metals held by

the U.S. government.

The real value of the dollar today depends only on the amount of goods and

services a dollar can purchase. That purchasing power depends primarily on

the relationship between the number of dollars people are holding as currency

and in their checking and savings accounts, and the quantity of goods and

services that are produced in the economy each year. If the number of dollars

increases much more rapidly than the quantity of goods and services produced

each year, or if people start spending the dollars they hold more rapidly,

the result is likely to be inflation. Inflation is an increase in the average

price of all goods and services. In other words, it is a decrease in the

value of what each dollar can buy.

The Federal Reserve System and Monetary Policy

Governments often attempt to reduce inflation by controlling the supply of

money. Consequently, organizations that control how much money is issued in

an economy play a major role in how the economy performs, in terms of prices,

output and employment levels, and economic growth. In the United States, that

organization is the nation’s central bank, the Federal Reserve System. The

system’s name comes from the fact that the Federal Reserve has the legal

authority to make banks hold some of their deposits as reserves, which means

the banks cannot lend out those deposits. These reserve funds are held in the

Federal Reserve Bank. The Federal Reserve also acts as the banker for the

federal government, but the government does not own the Federal Reserve. It

is actually owned by the nation’s banks, which by law must join the Federal

Reserve System and observe its regulations.

There are 12 regional Federal Reserve banks. These banks are not commercial

banks. They do not accept savings deposits from or provide loans to

individuals or businesses. Instead, the Federal Reserve functions as a

central bank for other banks and for the federal government. In that role the

Federal Reserve System performs several important functions in the national

economy. First, the branches of the Federal Reserve distribute paper currency

in their regions. Dollar bills are actually Federal Reserve notes. You can

look at a dollar bill of any denomination and see the number for the regional

Federal Reserve Bank where the bill was originally issued. But of course the

dollar is a national currency, so a bill issued by any regional Federal

Reserve Bank is good anyplace in the country. The distribution of currency

occurs as commercial banks convert some of their reserve balances at the

Federal Reserve System into currency, and then provide that currency to bank

depositors who decide to hold some of their money balances as currency rather

than deposits in checking accounts. The U.S. Treasury prints new currency for

the Federal Reserve System. The bills are introduced into circulation when

commercial banks use their reserves to buy currency from the Federal Reserve

Bank.

Second, the regional Federal Reserve banks transfer funds for checks that are

deposited by a bank in one part of the country, but were written by someone

who has a checking account with a bank in another part of the country.

Millions of checks are processed this way every business day. Third, the

regional Federal Reserve Banks collect and analyze data on the economic

performance of their regions, and provide that information and their analysis

of it to the national Federal Reserve System. Each of the 12 regions served

by the Federal Reserve banks has its own economic characteristics. Some of

these regional economies are concerned more with agricultural issues than

others; some with different types of manufacturing and industries; some with

international trade; and some with financial markets and firms. After

reviewing the reports from all different parts of the country, the national

Federal Reserve System then adopts policies that have major effects on the

entire U.S. economy.

By far the most important function of the Federal Reserve System is

controlling the nation’s money supply and the overall availability of credit

in the economy. If the Federal Reserve System wants to put more money in the

economy, it does not ask the Treasury to print more dollar bills. Remember,

much more money is held in checking and savings accounts than as currency,

and it is through those deposit accounts that the Federal Reserve System most

directly controls the money supply. The Federal Reserve affects deposit

accounts in one of three ways.

First, it can allow banks to hold a smaller percentage of their deposits as

reserves at the Federal Reserve System. A lower reserve requirement allows

banks to make more loans and earn more money from the interest paid on those

loans. Banks making more loans increase the money supply. Conversely, a

higher reserve requirement reduces the amount of loans banks can make, which

reduces or tightens the money supply.

The second way the Federal Reserve System can put more money into the economy

is by lowering the rate it charges banks when they borrow money from the

Federal Reserve System. This particular interest rate is known as the

discount rate. When the discount rate goes down, it is more likely that banks

will borrow money from the Federal Reserve System, to cover their reserve

requirements and support more loans to borrowers. Once again, those loans

will increase the nation’s money supply. Therefore, a decrease in the

discount rate can increase the money supply, while an increase in the

discount rate can decrease the money supply.

In practice, however, banks rarely borrow money from the Federal Reserve, so

changes in the discount rate are more important as a signal of whether the

Federal Reserve wants to increase or decrease the money supply. For example,

raising the discount rate may alert banks that the Federal Reserve might take

other actions, such as increasing the reserve requirement. That signal can

lead banks to reduce the amount of loans they are making.

The third way the Federal Reserve System can adjust the supply of money and

the availability of credit in the economy is through its open market

operations—the buying or selling of government bonds. Open market operations

are actually the tool that the Federal Reserve uses most often to change the

money supply. These open-market operations take place in the market for

government securities. The U.S. government borrows money by issuing bonds

that are regularly auctioned on the bond market in New York. The Federal

Reserve System is one of the largest purchasers of those bonds, and the bank

changes the amount of money in the economy when it buys or sells bonds.

Government bonds are not money, because they are not generally accepted as

final payment for goods and services. (Just try paying for a hamburger with a

government savings bond.) But when the Federal Reserve System pays for a

federal government bond with a check, that check is new money—specifically,

it represents a loan to the government. This loan creates a higher balance in

the government’s own checking account after the funds have been transferred

from the privately owned Federal Reserve Bank to the government. That new

money is put into the economy as soon as the government spends the funds. On

the other hand, if the Federal Reserve sells government bonds, it collects

money that is taken out of circulation, since the bonds that the Federal

Reserve sells to banks, firms, or households cannot be used as money until

they are redeemed at a later date.

The Wall Street Journal and other financial media regularly report on

purchases of bonds made by the Federal Reserve and other buyers at auctions of

U.S. government bonds. The Federal Reserve System itself also publishes a

record of its buying and selling in the bond market. In practice, since the

U.S. economy is growing and the money supply must grow with it to keep prices

stable, the Federal Reserve is almost always buying bonds, not selling them.

What changes over time is how fast the Federal Reserve wants the money supply

to grow, and how many dollars worth of bonds it purchases from month to month.

To summarize the Federal Reserve System’s tools of monetary policy: It can

increase the supply of money and the availability of credit by lowering the

percentage of deposits that banks must hold as reserves at the Federal

Reserve System, by lowering the discount rate, or by purchasing government

bonds through open market operations. The Federal Reserve System can decrease

the supply of money and the availability of credit by raising reserve ratios,

raising the discount rate, or by selling government bonds.

The Federal Reserve System increases the money supply when it wants to

encourage more spending in the economy, and especially when it is concerned

about high levels of unemployment. Increasing the money supply usually

decreases interest rates—which are the price of money paid by those who

borrow funds to those who save and lend them. Lower interest rates encourage

more investment spending by businesses, and more spending by households for

houses, automobiles, and other “big ticket” items that are often financed by

borrowing money. That additional spending increases national levels of

production, employment, and income. However, the Federal Reserve Bank must be

very careful when increasing the money supply. If it does so when the economy

is already operating close to full employment, the additional spending will

increase only prices, not output and employment.

Effect of Monetary Policies on the U.S. Economy

The monetary policies adopted by the Federal Reserve System can have dramatic

effects on the national economy and, in particular, on financial markets.

Most directly, of course, when the Federal Reserve System increases the money

supply and expands the availability of credit, then the interest rate, which

determines the amount of money that borrowers pay for loans, is likely to

decrease. Lower interest rates, in turn, will encourage businesses to borrow

more money to invest in capital goods, and will stimulate households to

borrow more money to purchase housing, automobiles, and other goods.

But the Federal Reserve System can go too far in expanding the money supply.

If the supply of money and credit grows much faster than the production of

goods and services in the economy, then prices will increase, and the rate of

inflation will rise. Inflation is a serious problem for those who live on

fixed incomes, since the income of those individuals remains constant while

the amount of goods and services they can purchase with their income

decreases. Inflation may also hurt banks and other financial institutions

that lend money, as well as savers. In a period of unanticipated inflation,

as the value of money decreases in terms of what it will purchase, loans are

repaid with dollars that are worth less. The funds that people have saved are

worth less, too.

When banks and savers anticipate higher inflation, they will try to protect

themselves by demanding higher interest rates on loans and savings accounts.

This will be especially true on long-term loans and savings deposits, if the

higher inflation is considered likely to continue for many years. But higher

interest rates create problems for borrowers and those who want to invest in

capital goods.

If the supply of money and credit grows too slowly, however, then interest

rates are again likely to rise, leading to decreased spending for capital

investments and consumer durable goods (products designed for long-term use,

such as television sets, refrigerators, and personal computers). Such

decreased spending will hurt many businesses and may lead to a recession, an

economic slowdown in which the national output of goods and services falls.

When that happens, wages and salaries paid to individual workers will fall or

grow more slowly, and some workers will be laid off, facing possibly long

periods of unemployment.

For all of these reasons, bankers and other financial experts watch the

Federal Reserve’s actions with monetary policy very closely. There are

regular reports in the media about policy changes made by the Federal Reserve

System, and even about statements made by Federal Reserve officials that may

indicate that the Federal Reserve is going to change the supply of money and

interest rates. The chairman of the Federal Reserve System is widely

considered to be one of the most influential people in the world because what

the Federal Reserve does so dramatically affects the U.S. and world

economies, especially financial markets.

LABOR AND LABOR MARKETS

Labor includes work done for employers and work done in a person’s own

household, but labor markets deal only with work that is done for some form

of financial compensation. Labor markets include all the means by which

workers find jobs and by which employers locate workers to staff their

businesses. A number of factors influence labor and labor markets in the

United States, including immigration, discrimination, labor unions,

unemployment, and income inequality between the rich and poor.

The official definition of the U.S. labor force includes people who are at

least 16 years old and either working, waiting to be recalled from a layoff,

or actively looking for work within the past 30 days. In 1998 the U.S. labor

force included nearly 138 million people, most of them working in full-time

or part-time jobs.

Most people in the United States receive their income as wages and salaries

paid by firms that have hired individuals to work as their employees. Those

wages and salaries are the prices they receive for the labor services they

provide to their employers. Like other prices, wages and salaries are

determined primarily by market forces.

Labor Supply and Demand

The wages and salaries that U.S. workers earn vary from occupation to

occupation, across geographic regions, and according to workers’ levels of

education, training, experience, and skill. As with goods and services

purchased by consumers, labor is traded in markets that reflect both supply

and demand. In general, higher wages and salaries are paid in occupations

where labor is more scarce—that is, in jobs where the demand for workers is

relatively high and the supply of workers with the qualifications and ability

to do that work is relatively low. The demand for workers in particular

occupations depends largely on how much the work they do adds to a firm’s

revenues. In other words, workers who create more products or higher-priced

products will be worth more to employers than workers who make fewer or less

valuable products. The supply of workers in any occupation is affected by the

amount of time and effort required to enter that occupation compared to other

things workers might do.

Workers seeking higher wages often learn skills that will increase the

likelihood of finding a higher-paying job. The knowledge, skills, and

experience a worker has acquired are the worker’s human capital. Education

and training can clearly increase workers’ human capital and productivity,

which makes them more valuable to employers. In general, more educated

individuals make more money at their jobs. However, a greater level of

education does not always guarantee higher wages. Certain professions that

demand a high level of education, such as teaching elementary and secondary

school, are not high-paying. Such situations arise when the number of people

with the training to do that job is relatively large compared with the number

of people that employers want to hire. Of course this situation can change

over time if, for example, fewer young people choose to train for the

profession.

Supply and demand factors change in labor markets, just as they do in markets

for goods and services. As a result, occupations that paid high wages and

salaries in the past sometimes become outdated, while entirely new

occupations are created as a result of technological change or changes in the

goods and services consumers demand. For example, blacksmiths were once among

the most skilled workers in the United States; today, computer programmers

and software developers are in great demand.

The process of creative destruction carries over from product markets to

labor markets because the demand for particular goods and services creates a

demand for the labor to produce them. Conversely, when the demand for

particular goods or services decreases, the demand for labor to produce them

will also fall. Similarly, when new technologies create new products or new

ways of producing existing products, some workers will have new job

opportunities, but other workers might have to retrain, relocate, or take new

jobs.

Factors Affecting Labor Markets

Changes in society and in the makeup of the population also affect labor

markets. For example, starting in the 1960s it became more common for married

women to work outside the home. Unprecedented numbers of women—many with little

previous job experience and training—entered the labor markets for the first

time during the 1970s. As a result, wages for entry-level jobs were pushed down

and did not rise as rapidly as they had in the past. This decline in

entry-level wages was further fueled by huge numbers of teens who were also

entering the labor market for the first time. These young people were the

children of the baby boom of 1946 to 1964, a period in which the birth

rate increased dramatically in the United States. So, two changes—one affecting

women’s roles in the labor market, the other in the makeup of the age of the

workforce—combined to affect the labor market.

The baby boomers’ effects have continued to reverberate through the U.S.

economy. For example, starting salaries for people with college degrees

became depressed when large numbers of baby boomers started graduating from

college. And as workers born during the boom have aged, the work force in the

United States has grown progressively older, with the percentage of workers

under the age of 25 falling from 20.3 percent in 1980 to 14.3 percent in

1997.

By the 1990s, the women and baby boomers who first entered the job market in

the 1970s had acquired more experience and training. Therefore, the aging of

the labor force was not affecting entry-level jobs as it once did, and

starting salaries for college graduates were rising rapidly again. There will

be, however, other kinds of labor market and public policy issues to face

when the baby boomers begin to retire in the early decades of the 21st

century.

Immigration

Labor markets in the United States have also been significantly affected by the

immigration of families and workers from other nations. Most families and

workers in the United States can trace their heritage to immigrants. In fact,

before the 20th century, while the United States was trying to settle its

frontiers, it allowed essentially unlimited immigration. see

Immigration: A Nation of Immigrants. In these periods the U.S. economy had more

land and other natural resources than it was able to use, because labor was so

scarce. Immigration served as one of the main remedies for this shortage of

labor.

Generally, immigration raises national output and income levels. These

changes occur because immigration increases the number of workers in the

economy, which allows employers to produce more goods and services. Capital

resources in the economy may also become more valuable as immigration

increases. The number of workers available to work with machines and tools

increases, as does the number of consumers who want to buy goods and

services. However, wages for jobs that are filled by large numbers of

immigrants may decrease. This wage decline stems from greater competition for

these jobs and from the fact that many immigrants are willing to work for

lower wages than other U.S. workers.

Immigration into the United States is now regulated by a system of quotas

that limits the number of immigrants who can legally enter the country each

year. In 1964 Congress changed immigration policies to give preference to

those with families already in the United States, to refugees facing

political persecution, and to individuals with other humanitarian concerns.

Before that time, more weight had been placed on immigrants’ labor-market

skills. Although this change in policy helped reunite families, it also

increased the supply of unskilled labor in the nation, especially in the

states of California, Florida, and New York. In 1990 Congress modified the

immigration legislation to set a separate annual quota for immigrants with

job skills needed in the United States. But people with family members who

are already U.S. citizens remain the largest category of immigrants, and U.S.

immigration law still puts less focus on job skills than do immigration laws

in many other market economies, including Canada and many of the nations of

Western Europe.

Discrimination

Women and many minorities have long faced discrimination in U.S. labor

markets. Employed women earn less, on average, than men with similar levels

of education. In part this wage disparity reflects different educational

choices that women and men have made. In the past, women have been less

likely to study engineering, sciences, and other technical fields that

generally pay more. In part, the wage differences result from women leaving

the job market for a period of years to raise children. Another reason for

the disparity in wages between men and women is that there is still a

considerable degree of occupational segregation between males and females—for

example, nurses are much more likely to be females and dentists males. But

even after allowing for those factors, studies have generally found that, on

average, women earn roughly 10 percent less than men even in comparable jobs,

with equal levels of education, training, and experience.

Analysis of wage discrimination against black Americans leads to similar

conclusions. Specifically, after controlling for differences in age,

education, hours worked, experience, occupation, and region of the country,

wages for black men are roughly 10 percent lower than for white men, though

occupational segregation appears to be less common by race than by gender.

Issues other than wage discrimination are also important to note for black

workers. In particular, unemployment rates for black workers are about twice

as high as they are for white workers. Partly because of that, a much lower

percentage of the U.S. black population is employed than the white

population.

Hispanic workers generally receive wages about 5 percent lower than white

workers, after adjusting for differences in education, training, experience,

and other characteristics that affect workers’ productivity. Some studies

suggest that differences in the ability to speak English are particularly

important in understanding wage differences for Hispanic workers.

The differences between the earnings of white males and earnings of females

and minorities slowly decreased in the closing decades of the 20th century.

Some laws and regulations prohibiting discrimination seem to have helped in

this process. A large part of those gains occurred shortly after the adoption

of the 1964 Civil Rights Act, which among other things, outlawed

discrimination by employers and unions. Many economists worry that the

discrimination that remains may be more difficult to identify and eliminate

through legislation.

Discrimination in competitive labor markets is economically inefficient as

well as unfair. When workers are not paid based on the value of what they add

to employers’ production and profit levels, society loses opportunities to

use labor resources in their most valuable ways. As a result, fewer goods and

services are produced. If employers discriminate against certain groups of

workers, they will pay for that behavior in competitive markets by earning

lower profits. Similarly, if workers refuse to work with (or for) coworkers

of a different gender, race, or ethnic background, they will have to accept

lower wages in competitive markets because their discrimination makes it more

costly for employers to run their businesses. And if customers refuse to be

served by workers of a certain gender, race, or ethnicity in certain kinds of

jobs, they will have to pay higher prices in competitive markets because

their discrimination raises the costs of providing these goods and services.

Those who are discriminated against receive lower wages and often experience

other forms of economic hardship, such as more frequent and longer periods of

unemployment. Beyond that, the lower wage rates and restricted career

opportunities they face will naturally affect their decisions about how much

education and training to acquire and what kinds of careers to pursue. For

that reason, some of the costs of discrimination are paid over very long

periods of time, sometimes for a worker’s entire life.

It is clear that there is still discrimination in the U.S. economy. What is

not always so clear is how much that discrimination costs the economy as a

whole, and that it costs not only those who are discriminated against, but

also those who practice discrimination.

Unions

Many U.S. workers belong to unions or to professional associations (such as

the National Education Association for teachers) that act like unions. These

unions and associations represent groups of workers in collective bargaining

with employers to agree on contracts. During this bargaining, workers and

employers establish wages and fringe benefits, such as health care and

pension benefits, for different types of jobs. They also set grievance

procedures to resolve labor disputes during the life of the contract and

often address many other issues, such as procedures for job transfers and

promotions of workers.

Many studies indicate that wages for union workers in the United States are

10 to 15 percent higher than for nonunion workers in similar jobs and that

fringe benefits for union workers also tend to be higher. That compensation

difference is an important consideration both for workers thinking about

joining unions, and for employers who are concerned about paying higher wages

and benefits than their competitors. In some cases, it appears that the

higher wages and benefits are paid because union workers are more productive

than nonunion workers are. But in other cases unions have been found to

decrease productivity, sometimes by limiting the kinds of work that certain

employees can do, or by requiring more workers in some jobs than employers

would otherwise hire. Economists have not reached definite conclusions on

some of these issues, but it is evident that there are many other broad

effects of unions on the economy.

Unions and collective bargaining in the United States are markedly different

from such organizations and procedures in other industrialized nations. U.S.

unions generally practice what is often described as business unionism,

which focuses mainly on the direct economic interests of their members. In

contrast, unions in Europe and South America focus more on influencing national

policy agendas and political parties.

The different focus by U.S. unions partly reflects the special history of

unions in the United States, where the first sustained successes were

achieved by craft unions representing skilled workers such as carpenters,

printers, and plumbers. These skilled workers had more bargaining power and

were more difficult for employers to replace or do without than workers with

less training. Unions representing these skilled workers were also able to

provide special services to employers that allowed both the unions and

employers to operate more efficiently. For example, craft unions in large

cities often ran apprenticeship programs to train young workers in these

occupations. And many craft unions operated hiring halls that employers could

call to find trained workers on short notice or for short periods of time.

Most of these craft unions were members of the American Federation of Labor

(AFL), founded in 1886. The strong bargaining position of these skilled

workers, and the fact that these workers typically earned much higher wages

than most other workers, led the AFL unions to focus on wages and other

financial benefits for their members. Samuel Gompers, the president of the

AFL for nearly all of its first 38 years, once summarized his philosophy of

unions by saying, “What do we want? More. When do we want it? Now.”

By contrast, industrial unions—which represent all of the workers at a firm

or work site, regardless of their function or trade—were generally not

successful in the United States before Congress passed the National Labor

Relations Act of 1935. This law, also known as the Wagner Act after its

sponsor, Senator Robert F. Wagner of New York, changed the way that unions

are recognized as bargaining agents for workers by employers, and made it

easier for unions representing all workers to win that recognition. The

Wagner Act largely put an end to the violent strikes that often occurred when

unions were trying to be recognized as the bargaining agent for employees at

some firm or work site. The act established clear procedures for calling and

holding elections in which the workers decide whether they want to be

represented by a union, and if so by which union. The Wagner Act also

established a government agency known as the National Labor Relations Board

(NLRB) to hear charges of unfair labor practices. Either employees or

employers may file charges of unfair labor practices with the NLRB.

After the Wagner Act was passed, the number of workers who belonged to unions

increased rapidly. This trend continued through World War II (1939-1945),

when unions successfully negotiated more fringe benefits for their members.

These fringe benefits were partly a result of wage and price controls

established during the war, which made large wage increases impossible. In

the 1950s union strength continued to grow, and the national association of

industrial unions, known as the Congress of Industrial Organization (CIO)

merged with the AFL.

Since the late 1970s, total union membership has fallen. The percentage of

the U.S. labor force that belongs to unions has decreased dramatically in the

last half of the 20th century, from more than 25 percent in the mid-1950s to

14 percent in 1997. A number of reasons explain the decline in union

representation of the U.S. labor force. First, unions are traditionally

strong in manufacturing industries, but since the 1950s manufacturing has

accounted for a smaller percentage of overall employment in the U.S. economy.

Employment has grown more rapidly in the service sector, particularly in

professional services and white-collar jobs. Unions have not had as much

success in acquiring new members in the service sector, with the exception of

government employees.

Union membership has also declined as the government established laws and

regulations that mandate for all workers many of the benefits and guarantees

that unions had achieved for their members. These mandates include minimum

wage, workplace safety, higher pay rates for overtime, and oversight of the

management of pension funds if employers fund or partially fund pensions.

Third, many U.S. firms have become more aggressive in opposing the

recognition of unions as bargaining agents for their employees, and in

dealing with confrontations involving existing unions. For example, it is

increasingly common for firms to hire permanent replacement workers if

strikes occur at a firm or work site.

Finally, workers with college degrees held a larger percentage of jobs in the

U.S. economy in the late 1990s than in earlier decades. These workers are

more likely to be in jobs with some level of managerial responsibilities, and

less likely to think of themselves as potential union members.

Unions, however, continue to play many valuable roles in representing their

members on economic issues. Equally or perhaps more importantly, unions

provide workers with a stronger voice in how work is done and how workers are

treated. This is particularly true in jobs where it is difficult to identify

clearly how much an individual worker contributes to total output in the

production process. During the 1990s, many U.S. manufacturing firms adopted

team production methods, in which small groups of workers function as a team.

Any member of the team can suggest ideas for different ways of doing jobs.

But management is likely to consider more carefully those that are

recommended by the union or have union support. Workers may also be more

willing to present ideas for job improvements to union representatives than

to managers. In some cases, workers feel that the union would consider how

the changes can be made without reducing jobs, wages, or other benefits.

Unemployment

A persistent problem for the U.S. economy and some of its workers is

unemployment—not being able to find a job despite actively looking for work

for at least 30 consecutive days. There are three major kinds of

unemployment: frictional, cyclical, and structural. Each type of unemployment

has different causes and consequences, and so public policies designed to

reduce each type of unemployment must be different, too.

Frictional unemployment occurs as a result of labor mobility, when workers

change jobs or wait to begin a new job. Labor mobility is, in general, a good

thing for workers and the economy overall. It allows workers to look for the

best available job for which they are qualified and lets employers find the

best-qualified people for their job openings. Because this searching and

matching by employees and employers takes time, on any given day in a market

economy there will be some workers who are looking for a new job, or waiting

to begin a job. Even when economists describe the economy as being at full

employment there will be some frictional unemployment (as much as 5 to 6

percent of the labor force in some years). This kind of unemployment is

generally not a major economic problem.

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

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