Unemployment and Inflation - Essay Example

?Topic: Unemployment and Inflation http www.economist.com/economics/by-invitation/questions/whats_wrong_americas_labour_market The content should be Article Summar y Introduction MacroeconomicsAnalysis of macroeconomics with regard to housing situation in the US Aggregate demand curves Aggregate Supply Conclusion Reference At the page 6, 7,8 not intext reference , although they are from same author or same article , you also needs add the intext reference as more as you can And you need adds Aggregate demand and curve Aggregate Supply graph draw for you, not download from internet. Thanks What is wrong with America’s labor market? Outline: I. Introduction (Part a, Article Summary) II. Why is the labor market weak? III. Is the problem primarily on the demand side or the supply side? IV. Would an active jobs policy help? V. The active policy VI. Conclusion VII. References. What is wrong with America’s labor market? I. Introduction This excerpt is from The Economist magazine. It considers the fall in the American economy with specific concern to the labor market. The Issue in concern discusses the reason behind the fall in labor market, whether the problem lies at the demand side or the supply side along with pros and cons for active job policy. Part (a) – Article Summary The article talks about persistent unemployment rate in America’s market. The models and theories used in this article are: 1. Different types of Unemployment 2. Economics factors of production 3. Economic Growth Model 4. Demand and Supply Theories 5. Keynes Theory of Income and Employment 6. Modern Macroeconomists view 7. Okun’s Law II. Why is the labor market weak? America has faced recession at June 2009 (NBER, 2009). After the recession in recovery USA has seen 2.8% annualized growth, this was of course real low therefore it cannot have assured a significant change in unemployment rate thereafter. This is slightly in accordance with the Okun’s Law, which says, “that for every 1% rise in the unemployment percentage there is approximate 2% fall in the potential Gross Domestic Product.” Though the exact accuracy of the law is yet under disputation, however it stills empirically recognizes the relationship between unemployment and country’s production. With only 2.8% real growth in the current recovery session, it is not at all surprising that job growth has been an issue. The resultant unemployment is due to cyclical variation therefore we could term it as cyclical unemployment - unemployment caused by business cycle recession. The current slight decrease in jobless rate of 0.1% is misleading; the growth rate could not be measure inconsiderate to other negative factors (the discouraged workers drop out). There are around 46% of jobless workers preferring to remain unemployed. This is because of the inability to find the works that satisfy their needs. The weakness in the production cycle has to be mostly blame but there are signs of an emerging disease in American called structural unemployment. Structural unemployment results from persistent mismatch between the features and skills of workers and the job demands or requirement. It last longer periods compared to the frictional unemployment, as worker would require time to learn new skills. The youth unemployment (frictional unemployment) is worse factor of the America’s weak labor market. America has a lesser fraction of prime age men in workplaces and in the labor force than any other in the G7 economy. Some 25% of men 25-54 years old with no college certifications, 35% of high school dropouts and approximately 70% of black high school dropouts are not working (Economist 2011 under Jobs for the future). In addition, this frictional unemployment arises from process of matching workers with job. Frictional unemployment might be good as the workers take time matching the job they are wishing to do. However, if the unemployment period is long then it is not beneficial for the economy, as short-term unemployment becomes long term. This is almost what is happening in recent American labor market (Economist 2011, under America's jobless men - Decline of the working man). III. Is the problem primarily on the demand side or the supply side? The main question is why that is such sluggish growth in the real GDP (Gross Domestic Product)? Whether, the problem lies at the demand section or the supply section. Both monetarists and Keynesians theologizes agree that several recessions are as the result of demand shortfalls. (Keynes theory of Income and Employment) Moreover, the speed of recovery in turn depends on how the demand recovers. The demand in the American labor market will recover through increase in demand for products and services (made by labors). For instance in any given period if American citizens save more than previous savings level the net demand for American products would decrease. However, if the supply of goods rises with same amount at the current level of product demands the net result would be equilibrium and no change in level of activity occur. (Demand and Supply Theories) See in the given figure: This is a temporary effect it is as the supplier yet has to adjust with the market and price changes. Observe that the Supply increases from S0 to S1 while demand (the activity level stays same) as a result the quantity falls. There is no rise in price as expected in the first diagram as a result the entire burden is born by the producer. This will result in fall in demand of labor and their wages. The net effect would be some of the American workers becoming unemployed. Modern macroeconomists dictates Federal job to maintain NGDP growth at consistent rate with macroeconomic stability or low inflation. Moreover, it is even important that monetary policymakers work to achieve the targets set. The ship needs to reach its destination at any cos. If the Fed hopes for a 5% NGDP, but predicts a decline in NGDP (like was in 2008) then Fed need to radically alter the monetary policy until the models and economists expects NGDP to grow at desired rate. (Economists 2011, under Guest-contribution-Decline of working men) IV. Would an active jobs policy help? Job is a central parameter of economic and competitive strength. (The Economists 2011, under Does America need a jobs policy?) In addition, a factor that can insulate any nation from social problems, that may arise in prolonged recession. America's labor market has been rather slow to recover from recession, with unemployment stubbornly falling only slowly or staying high. This has created need for active government intervention with aims of creating jobs. Whether a renewed active policy is the need of US economy is a debatable issue. Additionally, whether the new policy could bring any benefits for the labor market is another concern. The greater number of economic recovery United States has seen is the jobless recovery. When firms are uncertain to the changes in demand, they try to shift their burden to the current employment and capital as much as possible. Usually, the current working employees are the ones redundant before any plans for new recruitment are place in to practice. Consequently is the recognition of an initial spurt in productivity and unemployment. The result of which are the headlines of technological unemployment (technology replacing jobs and adding jobless growth) in news reports. Employment would then increase up later; journalists do not understand this change and call this US economy creativity. On this basis if we see the recent drop in the rate of unemployment, albeit long awaited, it is a sign that firms are on the move to become more optimistic about the US recovery that is good news. The real thing to ponder is that the employment increase in US economy has not come from the fierce battles of global competition instead employment growth results from sectors protected from foreign competitions. This covers public-sector employment, health-related or finance-related sectors employment in defense-related and other not easily tradable services. This attributes to less consumer consumption or expenditure. Consumers are not to be blame high oil prices and inflation rates are deterring consumers from spending. V. The active policy The easy way out of this all would be to gain a competitive boost – temporary by devaluing the dollar further. This is the “Detroit strategy” in use for past twenty years. On the other hand, America needs to alter its macroeconomics and form a policy to tackle the lack of full employment. The unemployment is due to low demand whereas the demand is low because of high product prices. (Economists 2011 under Reform could improve job growth in America's tradable sectors). Product prices are high due to three main factors of production, labor, capital and land. Labor and capital investment costs increases and cannot be reduce because of lack of productivity. Therefore, cost of the land plays a vital role in reducing the overall cost. Speculation increases land costs. The idea is to impose tax on these land values (regardless of their use at all) as then these lands would need to be place into use. As a result, the land monopoly of the speculators and banks in their value would become bearable. The result of all this would be more land availability and therefore its cost when place in practice would also be less. This tax could even replace income tax and other taxes. Thus, land value taxation has a double benefit, it reduces the production cost and it increase customers’ spending amount or buying capability. A tax on land values would cause the opportunity right of access to land. VI. Conclusion Labor economists point in two directions: the real estate market and a mismatch of skills between the demand for and supply of jobs. The problem lays in both supply and demand sides. Geographical mobility is very important but American citizen however, in depressed areas the real estate cost has changed such that people cannot move without bearing losses. Therefore, the other cause for unemployment is immobility. The second argument is with respect to labor skills that have probably become obsolete. Technological revolution has replace jobs that were earlier perform by labors manually. This result in permanent unemployment that is a red alert as such is not curable. Workers jobs become outdated and they are thus redundant resulting in de-skilling for many. If there is some truth behind these explanations then problem persisting in American labor market will of course not go away soon however, will eventually. In addition, this also explains why government can do little to improve the current situation in American labor market. (Questia under The Goals of Macroeconomy). VII. References: 1. Demand and Supply Theories, from http://www.ecoteacher.asn.au/Demand/dslide1/d5.htm 2. Hicks. J.R. Keynes' Theory of Employment Vol. 46, No. 182. (June 1936), pp. 238-253 3. Investopedia. Okun’s Law. from http://www.investopedia.com/terms/o/okunslaw.asp 4. Questia 1994 The Goals of Macroeconomy http://www.questia.com/googleScholar.qst?docId=103864966 5. The Economist 2011. Labor Market. Good but not great job growth continues from http://www.economist.com/blogs/freeexchange/2011/04/labour_markets 6. Economists 2011. Reform could improve job growth in America's tradable sectors from http://www.economist.com/economics/by-invitation/guest-contributions/reform_could_improve_job_growth_americas_tradable_sector 7. The Economist 2011. Guest-contribution. Decline of working men. from http://www.economist.com/economics/by-invitation/guest-contributions/theres_been_no_jobless_recovery_because_theres_been_no_r 8. The Economist (2011). Jobs for the future. from http://www.et1964.com/?p=582 9. The Economist 2011. Labour markets - Good but not great job growth continues from http://www.economist.com/blogs/freeexchange/2011/04/labour_markets 10. The Economist (2011) Does America needs a jobs policy? From http://www.economist.com/economist-asks/does_america_need_jobs_policy_1 Read More