How increased unemployment is playing a role on the increasing poverty levels - Essay Example

?Running head: How increased unemployment is playing a role on the increasing poverty levels Insert         Insert Grade Insert Name 8 December 2011  Outline Abstract Introduction Major impact of unemployment to society Causes of unemployment A proposed economic policy solution to the problem of unemployment and poverty Discuss how economic theory predicts the policy would work. Discuss how fiscal policy would impact the market or solve the economic problem Conclusion Abstract Unemployment is an economic problem that leads to poverty due to lack of income. Unemployment contributes to both economic and societal problems, which have negative impacts on the individuals such as depression, divorces, and lack of self-identity, among others. Nevertheless, there are solutions to the unemployment issue such as fiscal and monetary policies. This paper discusses the increased level of unemployment and its effects on an economy and the society as well. In addition, possible solutions and their effectiveness will be discussed at length as well. How Increased Unemployment Is Playing a Role on the Increasing Poverty Levels Unemployment as an Economic Problem Unemployment can be defined as the number of people in a nation without jobs, including those that are seeking for employment (OECD, 2003, p.32). Unemployment is a problem that affects many countries, to an extent of reducing productivity and loss of income opportunity. When the level of unemployment is high, the growth domestic product is lower compared to when the levels of unemployment are low. On the other hand, when the growth of domestic product is low, the levels of unemployment increase, the living standards of individuals are reduced, and the nation’s productivity decreases. Unemployment also contributes to loss of human capital, as the unemployed individuals do not contribute their skills and knowledge to the workforce. Moreover, unemployment does not only contribute to poverty, but it also reduces the levels of consumption and the ability of purchasing, and as a result, slowing down the potential of the market. Nevertheless, unemployment levels differ among different countries, taking different forms; however, the developing nations are highly affected by the unemployment issue compared to the advanced economies (OECD, 2003, p.32). For instance, the level of unemployment in China is 4.3 % while that of Japan is at 4.5%, nevertheless the unemployment rate of these countries does not remain constant; it keeps changing with time (trading economics, 2011). Below is a graph indicating the difference in levels of poverty among countries. Fig 1: 2011 unemployment rates of different countries. Needless to say, there are a number of reasons that cause unemployment in the world. First, some individuals lack the required skills and knowledge to tackle tasks, hence hindering their chances of acquiring a job. Secondly, the welfare payments and unemployment insurance are believed to contribute to the increasing levels of unemployment. The unemployed continue benefiting from these governments’ assisted programs, hence becoming reluctant to search for jobs. This paper will discuss the issue of unemployment, its impact to the society in causing poverty, and the possible solutions at length. Major impact of unemployment to society The Increasing levels of unemployment are continuously contributing to the level of poverty among nations, which negatively affects the economy and the society of these nations as well. There are various types of unemployment. Cyclical unemployment is one of them, which is influenced by the business cycle, for example, the higher the growth of domestic product, the lower the levels of unemployment, and vice versa (Hartley, 2010, p.29). Structural unemployment involves launching new products in the market, therefore changing the demand of certain goods. In return, unemployment rate in certain sectors increases, whilst jobs are created in other sectors. According to Kim (2010, p.57), one third of the world’s population is unemployed or underemployed, however, only few nations compensate their unemployed citizens. The high rate of unemployment has led to the emergence of unemployment programs. For instance, the unemployment insurance offered by the governments assists the unemployment to cope with the hardships of life. These programs ensure redistribution of income from the rich to the poor. Though these programs are beneficial to the unemployed people, the government is forced to distribute a lot of money if the levels of unemployment increase. In return, the unemployment benefits yield to a rise in financial additional costs, which is an added burden to the government (Jones, 2005). In addition, unemployment reduces the spending power of the unemployed individuals and their family, therefore affecting the economy of nation. The high rate of unemployment in a nation yields to the increase of taxes for the working force, and this in return affects their spending power. Nevertheless, unemployment is accompanied by despair, as individuals and families are forced to live in deplorable conditions due to lack of adequate incomes. The life expectancy of an individual can also be affected due to the conditions they live in. Unemployed individuals are likely to be depressed, as they think of how they will earn for their families, and as a result, their mental health is likely to be compromised (Davis, 2009, p.268). Unemployment can also cause health issues due to frustrations as well as tension in homes, which can contribute to divorces and separation. The developing nations have not implemented unemployment welfare programs, therefore the unemployed live in poverty and they may result in crimes to make ends meet. Therefore, the levels of crimes in these countries are high compared to where unemployment programs exist. In addition, employment gaps are evident, whereby, employers do not prefer hiring an individual who has been jobless for a long time, and as a result, the unemployed are very frustrated as their knowledge and skills become dormant. Needless to say, poverty increases as the level of unemployment increases; this is evident since the unemployed have no source of income, making them to struggle in providing basics needs for their families. In the state of unemployment, exploitation of laborers is common, as these individuals are desperate. Unemployment also creates gaps among people of the same society. Indeed, the employed continue to flourish while the unemployed continue to struggle; therefore, there exist different standards of living among citizens. According to Davis (2009, p.268), unemployment deprives an individual functional benefit such as self-identity, which can result in negative psychological outcomes, since they are worried of the future uncertainties. Davis (2009) further adds that unemployment combined with poverty can contribute to social immorality such as alcohol abuse and addiction, as well as other social vises like prostitution and adultery. Indeed, employed women are less likely to conceive out of wedlock compared to their unemployed peers. Warren & Strangleman (2008, p.272) argue that, unemployment is less traumatic in women compared to men. Men are considered insecure, especially if unemployed due to the ideology of a breadwinner. In addition, when the rate of unemployment is high, the employed feel insecure and therefore, hang on to their jobs despite their unsatisfactory nature. Causes of unemployment Unemployment is relatively high in developing countries, especially among the youths; Venatus & Agnes (2010, p.232) explains that in Nigeria the unemployment issue is contributed by a number of factors, among them the high population growth. The youths are forced to migrate to the capital city in search of jobs; however, the numbers of jobs are limited. In addition, there is a mis-match between the skills that individuals possess and the available jobs. Self-employment becomes extremely difficult due to lack of capital, while the lending organizations such as banks require collateral in form of a salary or assets that the unemployed do not possess. The developing nations are associated with poverty, especially in the east African countries; seasonal jobs contribute to unemployment. For instance, agricultural jobs only require workers for a specific period, after which the workers are laid off. The advanced technology has also contributed to the increase in automation; hence, some jobs are replaced by machines. Corruption in the developing nations also leads to funds embezzlement, which leads to under-development of these nations, and as a result, job creation becomes rare. Nevertheless, there are several solutions to the economic problem of unemployment. Employment insurance (EI) provides temporary assistance to the laid- off citizens as they look for other alternative jobs, and this is provided by some governments, especially in the developed nations such as Canada, United States and the United Kingdom among others. According to Spiegelman and Robins (2001, p.260), permanent job displacement is usually a problem throughout the year in many countries. For instance, in Canada, between 1981 and 1991, more than a million people were laid off from their jobs permanently. However, Spiegelman and Robins (2001, p.270) argue that the benefits provided by the employment insurance policy are likely to increase the rate of unemployment and are also cost- effective. Employment insurance is a hindrance for the unemployment to move to where labor is needed, as a form of determination to look for work. With the employment insurance present, there is a high possibility of surplus in the economy, because of the reduction of premiums at a slower rate than the benefits paid out. When the economy of a country is favorable, jobs are readily available; therefore, the government is likely not to dispense a lot of money on employment insurance. As a result, the dependency ratio is reduced. A proposed economic policy solution to the problem of unemployment and poverty Unemployment has proved to be an economic, as well as a societal problem; however, if this problem is not curbed, it can be destructive to an economy. Nations must find solutions for the unemployment issues. This problem affects both the technologically advanced nations and the developing nations as well, albeit at contrasting magnitudes. Ogbimi (2007) argues that, unemployment and poverty are the main symptoms of lack of industrialization; a nation cannot therefore promote sustainable economic growth, foster industrialization, and competence building especially in the developing nations. True growth which increases a nation’s and its citizen competences is necessary, as well as trivial growth, which is highly sustainable, hence irreversible. Achieving a sustainable economic growth is vital for any economy. One of the major contributions to unemployment is the lack of technological know-how (Ogbimi, 2007). Therefore, nations must educate and train individuals, in order to be competent; indeed, learning contributes to achievement of growth from one level to another, which should be irreversible and achievable. Therefore, industrialization and development contribute to the stability of an economy, thus aiding in provision of employment and productivity. Below is the figure illustrating the three variables that define an economy’s stability. Fig 2: the relationship of inflation and productivity to employment (Ogbimi 2007) The figure above illustrates that employment is an independent variable, whereas inflation and productivity are dependent variables. Therefore, the employment level of any nation determines its level of productivity and inflation. A healthy economy consists of skilled personnel; therefore, there is need for nations to foster education among their citizens by ensuring every individual has an opportunity to access the academic institutions, despite their backgrounds. A fiscal policy is an economic model that enables a nation to mitigate unemployment by encouraging public spending, increasing public production, and reducing taxes on the private sector. In the attempt of reducing unemployment levels, the government can budget surpluses and deficits as a buffer to prevent the rate of taxes from changing. Nevertheless, cutting taxes can be effective if the entrepreneurs’ returns are increased, therefore reducing the spending of customers. Therefore, the government can create jobs directly or indirectly. Indirect job creation can be in form of finances through reducing public spending or increasing debts, whilst direct job creation can be financed via raising debt or increasing the private sector taxes (Battaglini & Coate, 2011, p.3). Once executed, the fiscal policy can be very effective. When taxes are cut, consumers have more money to spend, hence increasing demand. Entrepreneurs can also have money to invest in their businesses, hence creating the need for more workforces. A study conducted by Ahmed & Khalel on fiscal and monetary policies effectiveness on the Egyptian economy revealed fiscal policy appeared to be effective compared to monetary policy in relation to the response of gross national product (Ahmed & Khalel, 2011, p.1035). How economic theory predicts working of the policy The Keynesian theory is one of the economic theories explaining that fiscal policy provides a solution to recession and it can combat increases in inflation. Keynesian theory suggests that the best way of stimulating aggregate growth is through tax reduction and increasing government spending. In times of recession, fiscal policy can work magic on an economy; the Keynesian theory emphasizes that cutting on spending on the economy reduces the aggregate demand levels, hence stabilizes the prices. Keynesian analysis indicates that fiscal policy is vital in maintaining a high level of output and employment. Classical economists view production as being more profitable when prices are low; hence, firms are capable of expanding their output. In addition, the economists argue that, with enough resources, an economy can result to full employment fast. They believe that expansionary fiscal policy is a contributor of high prices compared to gross domestic product, therefore encouraging nations to maintain a balanced budget that will stabilize the economy to full employment. Therefore, a nation can attain full employment rate as well as a desirable price level under the fiscal policy. How fiscal policy would impact the market or solve the economic problem The main aim of fiscal policy is to achieve excellent prices, desirable consumption level, income distribution, and desirable employment levels. However, the objectives of fiscal policy vary among countries. Fiscal policy changes the nature of aggregate demand for goods and services. This policy is vital in managing the economy as it raises the demand for goods and services. The greater demand for goods and services increases the prices and output as well. In case of high level of unemployment, the demand increase leads to increased output. Once a government runs an expansionary Fiscal policy, the level of output is restored, and therefore, there is availability of work for the unemployed. Fiscal policy changes the burden associated with future taxes. According to Stilwell (2011, p.3), fiscal policy plays a vital role in stabilizing the economy, which in return creates jobs opportunities via planning for budget deficit. In addition, when a government reduces the rate of income taxes, it benefits the citizens of a country. Therefore, in an attempt to strengthen the economy, a nation must incorporate fiscal policy with economic planning. Fiscal policy also meets the interests of the society by increasing job security, promoting equity, reducing instability, and improving quality of life (Stilwell, 2011, p.4). Conclusion Unemployment is an economic problem, which yields to negative effects such as poverty, lack of productivity, and wastage of skills and knowledge of the qualified unemployed individuals. Many developed nations have resulted to unemployment insurance, as a way of assisting the unemployed citizens. However, research has proved that the unemployment insurance results in high taxes for the employed, hence reducing their purchasing level, which interferes with the economy. In addition, unemployment insurance contributes to the increased levels of unemployment because the unemployed become dormant and neglect searching for jobs. There are many policies that a nation would result in curbing unemployment. A fiscal policy is an economic model that enables a nation to mitigate unemployment by encouraging public spending by increasing public production and reducing taxes on the private sector. This policy is, however expensive, but effective in reducing taxes, encouraging consumers to purchase more, which increases demand in the market. As a result, it contributes to increased growth of an economy through the creation of employment opportunities, which reduce the dependency number in a nation. References Stiwell, F. (2011). Fiscal Policy. Professor of Political Economy at the University of Sydney. Retrieved from http://web.ebscohost.com/ehost/pdfviewer/pdfviewer?vid=4&hid=15&sid=00b3c8d6-a018-4654-a0f5-3561a0631c60%40sessionmgr12 Ahmed, E & Khalel, M. (2011). Effectiveness of Fiscal and Monetary Policies On the Egyptian Investments. Australian Journal of Basic and Applied Sciences, 5(5); 1035-1044. Battaglini, M. & Coate, S. (2011). Fiscal policy and employment. 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Sexual Addiction & Compulsivity. Taylor & Francis Group, LLC. Jones, J. (2005). The impact of unemployment on our society. Helium, where knowledge rules. Retrieved from http://www.helium.com/items/23934-the-impact-of-unemployment-on-our-society Kim, W. (2010). Unemployment Risks and the Origins of Unemployment Compensation. Studies in Comparative International Development, 45:57–82. Retrieved from http://web.ebscohost.com/ehost/pdfviewer/pdfviewer?vid=4&hid=15&sid=df3ac54c-8e4d-40ba-8316-b05606d1075a%40sessionmgr12 Trading economics. (2011). Unemployment Rates, List by Country. Retrieved from http://www.tradingeconomics.com/unemployment-rates-list-by-country OECD. (2003). Society at a glance: OECD social indicators. Paris: OECD Publishing. Read More