“Comfy Dog Beds”, a fictitious dog bed company, worries about how the unemployment rate will affect its business.
One of the hottest topics in current events these days is the economy. Most recently, the primary focus has been on the fiscal cliff – you can click here to read the Kitchen Table News post on this topic. Although a deal on the fiscal cliff was reached on New Year’s Day (see the previous Kitchen Table News post), the higher taxes that many families will still have to pay, along with the National Debt continuing to spiral upward, has a lot of people worried that the country might still decline into a recession.
In late 2008, early 2009, the U.S. economy tumbled into a recession. This graph of U.S. stock market performance (the Dow Jones Industrial Average) shows how stocks declined during the recession. While stocks have returned to their previous levels, the economy is still in a very fragile state.
In a recession, people have less money, so they are spending less money, which hurts the economy in a cyclical way. For example, let’s say there is a business that sells dog beds, called “Comfy Dog Beds”. If the country is not a recession, and people are making enough money, then they would most likely be able to afford a “Comfy Dog Bed”. But let’s say a family is making less money – for example, because Mom’s employer could not afford to give her a raise, or worse, because Dad lost his job. Now this family has less money, so they have to make stricter decisions on how to spend it. Chances are the family dog would then need to be content to sleep on the floor, since a dog bed is really a luxury, not a necessity. So now, “Comfy Dog Beds” sells less dog beds, and hence makes less money, so the owner of the company has less to spend, and the effect trickles down.
Because many people are jobless or making less money, now the family dog has to sleep on the floor. A “Comfy Dog Bed” is now a luxury they can’t afford.
People who could work but have no job are considered unemployed, and the percentage of people who could work but are jobless is “the unemployment rate”. One of the biggest reasons that so many people are unemployed in this country is that there are simply not enough jobs for all of the citizens. The dearth of jobs is related to the weak economy, since only businesses that are thriving are able to create new jobs. If people with less money are less likely to buy a dog bed, then unemployed people with no income are most definitely not going to buy a dog bed. The fact is, some of you reading this post might even be in a family where one or both of your parents have no job, or you might know someone whose parents are unemployed.
Lowering the unemployment rate is always a top priority for any government administration. If the economy were to improve, that would help a lot to lower the unemployment rate, because companies could create more jobs. One thing the government could do to stimulate the economy is to encourage citizens to spend money by offering incentives for people who do so.
Let’s go back to our dog bed company example. Imagine that “Comfy Dog Beds” was started by a stay at home Mom who knows how to sew. To make the dog beds, she would go to the fabric store, buy the stuffing and the fabric, and put the dog beds together by hand. She could make about one dog bed a week in this way.
Now imagine that the economy is improving, because the government is allowing people to keep more of their money (i.e. they allowed taxes to remain low), or because the government is offering a tax discount to people who invest money into their businesses. The increase in “discretionary income” – buying things you want instead of only things you need – means more people in the community are able to afford a dog bed. Gradually, the demand for “Comfy Dog Beds” increases such that Mom needs to hire an employee to keep up with the increasing demands. So the fact that other people had more money to spend enabled her to create a job, thereby reducing the unemployment rate.
As the demand for “Comfy Dog Beds” increases even further, the Mom decides to to buy a sewing machine to be able to make the dog beds faster. Therefore, she just helped to stimulate the economy, because she helped the company who sells the sewing machines.
The owner of “Comfy Dog Beds” can now make dog beds even faster with her new sewing machine, and the sewing machine company makes more money because they are selling more sewing machines.
As other businesses are making things faster as well, sales increase for the sewing machine company, and they are able to give their employees a raise. Perhaps now a man who works for the sewing machine company who didn’t have enough money before might now be able to afford to buy a bed for his dog. Hence, the demand for “Comfy Dog Beds” is even higher, so the owner of the dog bed company needs to hire an employee just to answer the phone and handle all of the order taking and the billing. So yet another job has been created.
This man works for the fictitious sewing machine company. Business has improved for the sewing machine company, so his company gave him a raise. So now, he can afford to buy his dog a “Comfy Dog Bed”.
In this way, it would theoretically be possible for the government to help stimulate the economy. Through Obama’s first four years as President, it appeared that he did help the economy and decrease the unemployment rate. But is this really true?
Below you will see a graph depicting the trend in the unemployment rate over the past 10 years. As you can see, the unemployment rate had somewhat been holding steady from 2002 to 2008. Then, late in 2008, the country tumbled into a recession. As a result, many people lost their jobs suddenly, and the unemployment rate spiked. (When someone loses their job because the company could no longer afford to pay them it is called “getting laid off”.) You can see this effect reflected in the graph, where the unemployment rate jumps from about 5% in mid 2007 to 10% in early 2009. This happened right before President Obama took office, so he inherited quite a mess.
At the height of the recession, the unemployment rate skyrocketed from about 5% to about 10%.
While a 5% increase in unemployment may not seem like a lot, that translated to more than 15 million people in this country being unemployed, as opposed to 7.5 million people unemployed. So you can quickly see how “Comfy Dog Beds” would sell many fewer dog beds.
Many unemployed people in this country are also homeless, which means they don’t even have a bed for themselves, let alone their dog.
Recently, the White House has been trumpeting its success in lowering the unemployment rate. They say they have gotten it down to about 7.7%. But is this really accurate? No. The reason this number is not accurate is, there are many people who have been looking for a job for so long that they have given up looking entirely, and those people are not counted as part of the unemployment rate. The Labor Department measures unemployment only as the number of people currently looking for a job who can’t find one. People who have been looking for a job for more than four weeks but still have not found one are called “Discouraged Workers”. The group of unemployed people who have looked for a job for so long that they have simply given up looking is called “Hopeless Workers”. Five years ago, before the recession began, about 2.5 million people said they wanted a job but hadn’t searched for one in at least a year. Now, that number is around 3.25 million.
While “Discouraged Workers” are counted as part of the unemployment rate; “Hopeless Workers” are not counted at all. Photo reprinted from money.cnn.com.
So, while the unemployment rate may appear to be declining, implying that more people who want jobs have found them, the number of people looking for a job who have given up entirely has increased. So really, the unemployment rate is much higher than the government says it is. If you want more information, you can click on this chart to see what the true unemployment rate is. What you will find is that the actual unemployment rate is closer to 14.4%.
So as a Middle School Student, you and your friends will one day have the responsibility of creating value in our society, and creating businesses which will help our economy and our society overall. By taking an interest now, you can create the future you want for your friends and yourself.
The future of America is our Middle School Students. Photo reprinted from Wreaths Across America. http://usoonpatrol.org/frontlines/2010/12/08/wreaths-across-america-day-4-r
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