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Global Challenges Unemployment

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Unemployment

Unemployment occurs when a person is available to work and currently seeking work, but the person is without work.The prevalence of unemployment is usually measured using the unemployment rate, which is defined as the percentage of those in the labor force who are unemployed. The unemployment rate is also used in economic studies and economic indexes such as the United States' Conference Board's Index of Leading Indicators as a measure of the state of the macroeconomics.

There are a variety of different causes of unemployment, and disagreement on which causes are most important. Different schools of economic thought suggest different policies to address unemployment. Monetarists for example, believe that controlling inflation to facilitate growth and investment is more important, and will lead to increased employment in the long run. Keynesians on the other hand emphasize the smoothing out of business cycles by manipulating aggregate demand. There is also disagreement on how exactly to measure unemployment. For example, the conservative government, when in power in the United Kingdom, changed the way in which employment was measured several times. Each time, the figure reduced (Social Trends).^{[citation needed]} Different countries experience different levels of unemployment; the USA currently experiences lower unemployment levels than the European Union, and it also changes over time (e.g. the Great depression) throughout economic cycles.

Types

According to economist Edmond Malinvaud, the type of unemployment that occurs depends on the situation at the goods market, rather than that they belong to opposing economic theories.If the market for goods is a buyers' market (i.e.: sales are restricted by demand), Keynesian unemployment may ensue while a limiting production capacity is more consistent with classical unemployment.

A common typology of unemployment is the following:

Frictional unemployment

Frictional unemployment occurs when a worker moves from one job to another. While he searches for a job he is experiencing frictional unemployment. This applies for fresh graduates looking for employment as well. This is a productive part of the economy, increasing both the worker's long term welfare and economic efficiency. It is a result of imperfect information in the labour market, because if job seekers knew that they would be employed for a particular job vacancy, almost no time would be lost in getting a new job, eliminating this form of unemployment.

Classical unemployment

Classical or real-wage unemployment occurs when real wages for a job are set above the market-clearing level. This is often ascribed to government intervention, as with the minimum wage, or labour unions. Some, such as Murray Rothbard,suggest that even social taboos can prevent wages from falling to the market clearing level.

Structural unemployment

Structural unemployment is caused by a mismatch between jobs offered by employers and potential workers. This may pertain to geographical location, skills, and many other factors.

If such a mismatch exists, frictional unemployment is likely to be more significant as well. Seasonal unemployment occurs when an occupation is not in demand at certain seasons.

Cyclical or Keynesian unemployment

Cyclical or Keynesian unemployment, also known as demand deficient unemployment, occurs when there is not enough aggregate demand in the economy. This is caused by a business cycle recession, and wages not falling to meet the equilibrium rate.

Causes

There is considerable debate among economists as to the causes of unemployment. Keynesian economics emphasizes unemployment resulting from insufficient effective demand for goods and services in the economy (cyclical unemployment). Others point to structural problems, inefficiencies, inherent in labour markets (structural unemployment). Classical or neoclassical economics tends to reject these explanations, and focuses more on rigidities imposed on the labor market from the outside, such as minimum wage laws, taxes, and other regulations that may discourage the hiring of workers (classical unemployment). Yet others see unemployment as largely due to voluntary choices by the unemployed (frictional unemployment).

Though there have been several definitions of voluntary and involuntary unemployment in the economics literature, a simple distinction is often applied. Voluntary unemployment is attributed to the individual's decisions, whereas involuntary unemployment exists because of the socio-economic environment (including the market structure, government intervention, and the level of aggregate demand) in which individuals operate. In these terms, much or most of frictional unemployment is voluntary, since it reflects individual search behavior. On the other hand, cyclical unemployment, structural unemployment, and classical unemployment, are largely involuntary in nature. However, the existence of structural unemployment may reflect choices made by the unemployed in the past, while classical unemployment may result from the legislative and economic choices made by labor unions and/or political parties. So in practice, the distinction between voluntary and involuntary unemployment is hard to draw. The clearest cases of involuntary unemployment are those where there are fewer job vacancies than unemployed workers even when wages are allowed to adjust, so that even if all vacancies were to be filled, there would be unemployed workers. This is the case of cyclical unemployment, for which macroeconomic forces lead to microeconomic unemployment. See also: unemployment types

Open unemployment is generally associated with capitalist economies. In this view, unemployment is not an aberration of capitalism, indicating any sort of systemic malfunction. Rather, unemployment is a necessary structural feature of capitalism, intended to discipline the workforce. If unemployment is too low, workers make wage demands that either cuts into profits to an extent that jeopardize future investment, or are passed on to consumers, thus generating inflationary instability. David Schweickart suggests, "Capitalism cannot be a full-employment economy, except in the very short term. For unemployment is the "invisible hand" -- carrying a stick -- that keeps the workforce in line.".

Classical economists dispute this, arguing that when there is too high a supply of labour, providing unions and Government have no prevented wage changes, the wage rate should fall, returning the economy to its long run efficient position at full employment.

Libertarian thinkers like F.A. Hayek claimed that unemployment increases the more the government intervenes into the economy to try to improve the rights of those with jobs. For example, he asserted that minimum wages raise the cost of labour to above the market equilibrium, resulting in people who wish to work at the going rate but cannot as the wages are higher than their worth to business; unemployment.They believed that laws restricting layoffs made businesses less likely to hire in the first place leaving many young people unemployed and unable to find work.

This school (the Austrian School) argued that the results of both actions lead to less productivity and are claimed to incur a higher cost on society as a whole. The results lead to not just higher unemployment but may increase poverty. The narrative continued by saying that the welfare state then responds with various benefits that are paid for by the middle and upper class which reduces their ability to consume and reduces the incentive to work hard and innovate for all sections of society, as the poor have income without working and the rich see their reward for work reduced.Economists like Ludwig Von Mises, Milton Friedman, Friedrich Von Hayek not only believe that the welfare of society decreases with this kind of intervention but that these economic policies are not sustainable.

One of the explanations behind (structural unemployment) and a warning that this kind of unemployment could be permanent in modern society, came from economist and philosopher André Gorz.The microchip revolution and the explosion in computer science and robotising of work even in less developed industrialized countries is the main reason.

He therefore argues that the idea of `working less so everyone can work and that an basic income for all must be the solution,and he explains: "The connection between more and better has been broken; our needs for many products and services are already more than adequately met, and many of our as-yet- unsatisfied needs will be met not by producing more, but by producing differently, producing other things, or even producing less. This is especially true as regards our needs for air, water, space, silence, beauty, time and human contact...

"From the point where it takes only 1,000 hours per year or 20,000 to 30,000 hours per lifetime to create an amount of wealth equal to or greater than the amount we create at the present time in 1,600 hours per year or 40,000 to 50,000 hours in a working life, we must all be able to obtain a real income equal to or higher than our current salaries in exchange for a greatly reduced quantity of work...

"Neither is it true any longer that the more each individual works, the better off everyone will be. The present crisis has stimulated technological change of an unprecedented scale and speed: `the microchip revolution'. The object and indeed the effect of this revolution has been to make rapidly increasing savings in labour, in the industrial, administrative and service sectors. Increasing production is secured in these sectors by decreasing amounts of labour. As a result, the social process of production no longer needs everyone to work in it on a full-time basis. The work ethic ceases to be viable in such a situation and workbased society is thrown into crisis," André Gorz, Critique of Economic Reason,Gallié, 1989.

Okun's Law

Okun's law states that for every 2% GDP falls relative to potential GDP, unemployment rises 1% (of the total workforce). When the economy operates at productive capacity, it will experience the Natural rate of unemployment.

U= ^u-h[100(y/yn)-100]

Solutions

ocieties try a number of different measures to get as many people as possible into work. However, attempts to reduce the level of unemployment beyond the Natural rate of unemployment generally fail, resulting only in less output and more inflation.

Phillips Curve

It used to be largely believed that unemployment could be solved using the Phillips curve. This involves increasing inflation to reduce unemployment by fooling workers into accepting jobs at a lower rate than they would otherwise have done, due to the declining value of money.However, since the work of Milton Friedman, it is widely accepted that the Phillips curve is vertical in the long run: you cannot achieve a lowering of the unemployment rate in the long run, and attempts to do so will only cause inflation.

Demand side

Normal markets reach equilibrium, where supply equals demand; everyone who wants to sell at the market price can. Those who do not want to sell at this price do not; in the labour market this is classical unemployment. Increases in the demand for labour will move the economy along the demand curve, increasing wages and employment. The demand for labour in an economy is derived from the demand for goods and services. As such, if the demand for goods and services in the economy increases, the demand for labour will increase, increasing employment and wages.

Monetary policy and fiscal policy can both be used to increase short-term growth in the economy, increasing the demand for labour and decreasing unemployment.

Supply side

However, the labour market is not efficient: it doesn't clear. Minimum wages and union activity keep wages from falling, which means too many people want to sell their labour at the going price but cannot. Supply-side policies can solve this by making the labour market more flexible. These include removing the minimum wage and reducing the power of unions, which act as a labour cartel. Other supply side policies include education to make workers more attractive to employers.

Supply side reforms also increase long-term growth. This increased supply of goods and services requires more workers, increasing employment. It is argued that supply side policies, which include cutting taxes on businesses and reducing regulation, create jobs and reduce unemployment.

Tax-related

One structural solution to unemployment proposed was a graduated retail tax, or "jobs levy", to firms where labor is more expensive than capital. This method will shift tax burden to capital intensive firms and away from labor intensive firms. In theory this will make firms shift operations to a more politically desired balance between labor intensive and capital intensive production. The excess tax revenue from the jobs levy would finance labor intensive public projects. However, by raising the value of labour artificially above capital, this would discourage capital investment, the source of economic growth. With less growth, long-run employment would fall.

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