Market Economy and Unemployment - Essay Example

? In Economic by The of the The of the The of the school The and where it is located Nowadays, the market economy is quite rigid system of relations. But mankind produced a series of standards, fixed in clear legal forms, ensuring the protection of economic rights of people. Unfortunately, the least regulated in this sense problem is a problem of unemployment. It is a well-known fact that social tensions in any society increases, when the number of people who are not currently working – unemployed -.approach the dangerous limits. After losing job, consequently, people lose their sources of income. Therefore, to characterize the degree of the working population, the term "unemployment rate" - the ratio of the number of people to the value of national workforces – is used. One can distinguish three types of unemployment. Frictional unemployment is generated by a constant rate of population movement between areas, from profession to profession. Such unemployment exists even at full employment due to job changing and looking for the best work (it is often regarded as voluntary unemployment). Structural unemployment results from technological changes in the economy, long-term shifts in consumer demand or relocation of jobs from one district to another. In this case, even skilled workers remain jobless. Cyclic unemployment is caused by a generally low demand for labor in all sectors and regions; such type of unemployment is a result of slowdown in economic activity in the country. In general, such involuntary unemployment negatively affects the morale of man; it is also harmful for the psyche. Unfortunately, this type of unemployment prevails in the United Kingdom nowadays. The country is still getting through the effects of the recent world’s crisis, which occurred in 2008 and resulted in large-scale global economy recession. Suffice it to recollect the strikes occurred against the backdrop of a sharp rise in unemployment in the UK (the strike of workers of a refinery plant in Lindsey, Lincolnshire, 2009; the strike of employees of a steel mill in Corus, Redcar). In 2009, there were nearly 2 million unemployed people in the UK (Trading Economics.com, 2009). It is believed that there is so-called natural (normal) unemployment rate, which determines the maximum possible level of employment. In the United Kingdom it is 4 % (Trading Economics.com, 2011). The downsides of unemployment in the UK are the lag of GNP, compared to the amount that the society would have at its potential, loss of income for lots of people, loss of national output, uneven distribution of the costs of unemployment among different social groups, a great many of workers lose their skills. “High unemployment has an impact on government expenditure, taxation and the level of government borrowing. An increase in unemployment results in higher benefit payments and lower tax revenues. If any person is unemployed, he or she receives benefits, consequently - pay no income tax. It is obvious that when people spend less, they contribute less to the government in indirect taxes. This rise in government spending along with the fall in tax revenues may result in a higher government borrowing requirement (so-called public sector net cash requirement)” (Davidson, 2009). Office for National Statistics UK unveiled data on unemployment in the country (February - April 2011). The unemployment rate for the three months is to remain at the level of January - March and will make 7, 8%, according to analysts (UK National Statistics, 2011). Past two years, countries around the world pursue a policy of fiscal stimulus package, unprecedented in scope - at least for a time of peace. In Greece, the USA, India, Britain and some other states budget deficit exceeded 10% of GDP (UK National Statistics, 2010). Naturally, “this is a classic Keynesian response to economic downturn - when demand in the private sector is reduced, the state must fill the gap to prevent economic collapse” (Davidson, 2009). The economist John Maynard Keynes was convinced that the cause of all economic diseases was lack of demand. Neokeynesianism still offers changing of the economic policy by increasing government spending and "weakening" of monetary policy, believing that small inflation is useful for market. However, despite the fact that wages are inextricably linked to prices, real wages do not increase due to inflation. In the inflationary economy, everyone will expect inflation and plan the budget according to expectations, so, the entire process will result in aggregate demand reduction only. Moreover, there are countless evidences that inflation is harmful to economic activity by itself, and thus, it is harmful to employment. Other “Keynesian medicine”, called “high government expenditure”, in fact, has been practiced in Europe for more many years. In fact, all Western European countries have budget deficit. And that, oddly enough, does not prevent from unemployment. On the other hand, the budget deficit leads to higher interest rates. If we consider that public expenditures are financed by the taxpayers, then the negative effect on the labor market is ensured (Davidson, 2009). Another reason to doubt the theory of “demand traps” is that international trade is rampant since globalization processes in the world. And that's foreign trade that can help avoid demand deficit. Moreover, there is no point in increasing consumption - it's too expensive to stimulate demand (Keynes, 2007). In some European countries, imported goods and services make up most of the costs of limiting intake. The merit of Keynes's theory of the development of unemployment was in the fact that it presents a logical model of the mechanism, untwisting the economic instability and its integral component - unemployment. Keynes pointed out that during the growth of national economy, not all people’s income is consumed, and some of it is converted into savings. So, the state should have a certain level of so-called effective demand, consumptive and investment, to turn such savings into investments. The fall in consumer demand dampens interest to invest, and, consequently, decreases the demand for investment. Along with falling incentives for investment, there is a fall in production, which leads to unemployment. Nowadays, the problem of unemployment is a painful issue for the countries throughout the world. The unemployment is not just loss of income source for lots of people, but also enormous damage to the economy of the state. There are plenty of approaches, suggesting the ways of unemployment reduction (suck as Keynesianism) and economy recovering. Still, as practice shows, none of them is universal and efficient. References Davidson, Paul (2009). The Keynes Solution: The Path to Global Economic Prosperity. Palgrave=McMillan. Keynes, J M 2007 [1936]. The General Theory of Employment, Interest and Money. Basingstoke, Hampshire: Palgrave Macmillan. Trading Economics.com 2009, 2011. Retrieved 19 May from < http://www.tradingeconomics.com/united-kingdom/unemployment-rate > UK National Statistics 2010, 2011. Retrieved 19 May from < http://www.statistics.gov.uk/hub/index.html> Read More