Critically evaluate, using appropriate economic theory, the different policies that could be used to tackle rising unemployment in an economy. What are the implications of these policies for the national economy as a whole?
Unemployment is considered as a flow concept, that’s there are inflows, constants as well as outflows from the total registered numbers. It falls and also rises when more unemployed people leave or register for work every month. The unemployed in economics are those persons that are able, willing and also available to work in any suitable job at the existing or the going wage payment rate but cannot find employment. The economic costs that are related to unemployment are many and varied (Boseley, 2015). High unemployment rates are costly to individuals, families and regional as well as to the national economies (Schmitt, Rho and Fremstad, 2009). Increased unemployment leads to social, physical and economic deprivation (Ball, Milmo and Ferguson, 2012). There is a relationship between increased unemployment, rising levels of crime, worsening social dislocation i.e. increased divorce rates, lower life expectancy and worsening health besides increased poverty (Davis & Harrigan, 2011.) Regions that have been badly hit by unemployment register a reduced real income and expenditure together with increased income inequality (Mankiw and Taylor, 2011).
For any economy to grow then the issue of unemployment must be addressed and long term planning and policies put in place to deal with the issue must be taken seriously for future sound economic prosperity. There are many types of unemployment and each case is addressed differently depending on the source and nature of the cause (Krugman, Wells and Graddy, 2006).
Unemployment has many causes depending on the level of national or regional economic activity while others are due to inept labour market that cannot perform optimally. The following are the types of unemployment that i will discuss in this paper together with their economic solutions.
Real wage unemployment, frictional unemployment, demands deficient unemployment, structural unemployment and hidden unemployment. The economic solution of unemployment depends on the nature and source of the unemployment (Romer, 2011).
Real Wage Unemployment
This is a type of dis-equilibrium unemployment and it mostly occurs where the real or actual wages for jobs in the market have been influenced to be above the normal or market clearing level. For many years the trade union movements, civil society groups and wages council have been known to cause these kind of unemployment because of their advocacy for fair wages. However, the real wage unemployment is also caused by other factors despite the ones mentioned infact the influence of labour movements in the UK has decreased to very low levels that their decisions are almost insignificant in recent years.
To address the real wage unemployment, the government has to adopt strategies that would make the labor market more flexible and adaptable to changes in demand and also supply conditions. Real wages should be able to rise when the demand for labour rises as well as output and employment. In the same way, they should also fall in case of a recession in the economy.
Demand Deficient Unemployment
This type of unemployment is related to economic recession or even tough economic periods where the economy slows down drastically. It occurs when the national output level falls in the economy hence most companies retrench workers in an effort to cut down expenses and protect profits. Labour as a factor of production is practically a derived demand and any decrease or drop in demand for output also causes an inward shift for the demand of labor on each wage level. This process is referred to as labor-shedding. Demand deficient unemployment occurs also in the long run when the economy is constantly underperforming.
Demand deficient unemployment is controlled by policies that raise the rate or level of aggregate demand for services or goods in the general economy. Several policies can be applied;
Increased Government Expenditure
The government can increase the level of expenditure in order to increase the aggregate demand which can result in a multiplier effect on the national income equilibrium. This policy is known as fiscal pump-priming that targets the increment in government expenditure and it targets mostly the increment in capital projects, health and education services. These are projects like construction of new roads, hospitals or other infrastructural projects like dams and bridges. Economic growth leads to creation of more jobs in the economy.
The reduction in taxation by a government increases disposable income for the consumers which boost household expenditure. The effect in reduction of taxes is more effective when the majority of the low income earners are affected positively by the reduction. The low income earners have a greater percentage of disposable income mostly because the huge number of families in the low income bracket.
Lower Interest rates
The reduction of interest rates by relaxation of monetary policies to encourage and expand creation of credit, increase real disposable income and reduction of savings encourages consumption and also demand. Low interest’s rates motivate companies and investors to invest more as the marginal total cost of investment decreases (Ryan-Collins, Werner & Jackson, 2012)
Depreciation of a country’s currency exchange rate
A lower value of a country’s currency leads increased exports and reduction of imports hence more opportunities for jobs in the market increases (Parkin, Powell and Matthews, 2012).
Structural unemployment occurs where there is a mismatch between the skills required by the employers and the registered skills that the potential employees possess. For example, employees that have been retrenched due to redundancies cannot get jobs in other sectors as they lack the relevant skills required for the available jobs. For example, a redundant worker in a ship yard would find it difficult to get a job in a law firm or in a specialized manufacturing company.
There are several ways of tackling structural unemployment. One of the methods is through direct government action to create and match jobs for the unemployed persons (Coy, 2012).
Regional policy incentives
This is a policy by the government to grant subsidies to companies to encourage or motivate them to relocate to regions that have high unemployment rates. However, these policies don’t address the problems created by occupational immobility. Most regional policies maintain that the workers must have relevant skills that may require retraining before they are allowed to take up other new jobs (Sloman, Wride and Garrett, 2012).
Investment in worker training
The companies and also the government should invest in training schemes that provide adequate training through vocational education that may guarantee employment in a competitive labour market.
Improving geographical labour mobility
The government should invest and provide grants for construction of low cost housing projects that may encourage workers to relocate to other regions that have jobs. The major challenge however is that most workers are normally tied down by social ties and strong family connections.
Hidden unemployment is mostly related with persons who have not been actively involved in gaining meaningful employment due to their lack of interest in searching for jobs hence they are not classified as unemployed. For example, potential workers who are no longer searching for jobs due to reasons such as lack or loss of motivation, discouragement or lack of required skills.
Hidden unemployment can be reduced or controlled by the government reducing the benefits for the unemployed and ensuring that sufficient information and evidence is provided that proves that the potential employee has been actively searching for employment before the unemployed allowances are released to the beneficiaries.
Finally to conclude, some economists however contend that the some causes of unemployment such as structural unemployment can be tackled easily by allowing the market to naturally reallocate the resources as the market forces demands. Intervention slows down the natural reallocation of resources.
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Coy, P. (11 September 2012). U.S. jobless rate drops for the worst of all reasons. Businessweek.Com, 5.
Davis, R.D. & Harrigan, J. (2011) Good Jobs, Bad jobs and Trade Liberalization, Journal of International economics 84, 26-36 Retrieved 6 march 2015 from www.elsevier.com/locate/jie
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Schmitt, J., Rho, H. J. and Fremstad, S. (2009) U.S. Unemployment Now As High as Europe. Center for Economic and Policy Research, May.
Sloman, J., Wride. A. and Garrett, D. (2012). Macroeconomics. FT Prentice Hall: Chapters 15, 20 and 21.