Unemployment and its Effect on Consumer Spending - Term Paper Example

? Unemployment and its effect on Consumer Spending The International Labor Organization describes Unemployment as a where a person (during a specific period of time) is without work, currently available for work or is seeking work (ILO, 1982). Unemployment has been a major issue that has been prevailing in every country’s economy since the global economic recession hit the world during the year 2007. Many countries have tried to mitigate its effect brought upon by the global recession whilst many other countries are still facing the curse with increasing unemployment rate. The unemployment rate is considered to be a measure through which a country’s unemployment is measured in terms of percentage. This is calculated by the dividing the total number of unemployed population with that of the employed ones in the country. Unemployment within a country can bring upon many different negative issues within an economy and this could further deteriorate the country’s performance. Consumer spending is an issue that is considered to have an inverse relationship with unemployment. This relation can be graphically presented as follows: Consumer spending is the total aggregate demand of goods and services within an economy. Consumer spending, in simpler terms, can be referred to as the expenditure made by an individual. Consumer spending usually gets affected by different factors prevailing within an economy. There are many different factors that can vary the level of consumer spending (tax being one of the greatest factors). Unemployment has brought upon severe effects on consumer spending within the entire world. An increase in the level of unemployment was seen when the recession hit within the 2007, although this recession is considered to be the second recession within the same decade i.e. 2000 – 2010, it had severe negative effects. The reason that the 1st recession was less damaging was because during that period i.e. 2001-2002, people carried out their respective expenditure trends because they availed the mortgage facility. On the other hand, consumer spending was severely affected during the second recession period i.e. 2007, this was because the individuals were unable to spend the same amount of money because the mortgage facilities had been negatively affected and the real estate values had dampened during that period. Although the Bureau of Labor Statistics within the United States showed a reduction in the unemployment rate i.e. a fall of 0.4%, people still find it really difficult to find jobs within the country. According to many different commentators, the figures provided by the Bureau of Labor Statistics do not prove to be closer to reality. According to these commentators, an average unemployed worker approximately needs 33 weeks to find a job for himself. Such fall back and deteriorating facts contrast the figures provided by the Bureau of Labor Statistics and it is for this reason that many commentators have considered it to be bias (Jacob, 2011). The recent unemployment rate within the United States can be graphically shown as below (WSJ, 2012) This increase in the rate of unemployment has led to a reduction in the consumer spending level within the United States. Unemployment and consumer spending have contrasting issues i.e. they are inversely proportional. An increase in the level of unemployment would definitely reduce the level of consumer spending within an economy. Consumer spending is a necessary element that is required to stimulate an economy and it is for this reason, many governments try to put in proper monetary and fiscal policies that may increase consumer spending in order to reduce inflation and maintain other economic factors within a country. The United States consumer spending level has not been pleasing during the past few years. According to the US Commerce Department, the consumer spending has risen by just a minute 0.1%. This increase has been considered to be really low as opposed to the predictions made by the US Commerce department. The United States considers consumer spending to be one of the major factors that makes up to 70% of the country’s economic activity and 0.1% increase in the consumer spending is considered be not a great sign for the country. This slowest increase is affiliated with the decreased unemployment and income issues. Although there have been several reports that show that the unemployment rates have improved but these reports totally quash when they are presented alongside the consumer spending surveys (BBC, 2011). According to a news release by the Bureau of Labor Statistics, the average annual expenditure within the United States fell by 2% within the year 2010, this reduction in the spending level was contrasted by an increase in the goods and services by 1.6%. According to the new release, the level of average annual expenditures in the year 2010 was $48,109. This figure was lower than that of the average annual expenditure figure of the year 2006 ($48,398) (BLS, 2011). These figures clearly indicate that the consumer spending within the United States have been following a declining pattern and this is not also alarming for the United States labor markets but it is also a sign of concern to the global markets as United States constitutes one-fifth of the entire world’s economic activity. (Washington Post, 2012) An increase in the level of unemployment escalates the inflation rates within an economy i.e. if proper measures are not taken up by the government of that particular country. The best way to eliminate recession within in the country is by stimulating the economy and this stimulation is only possible if the consumer spending is increased. A reduction in the interest rate is usually one of the best ways to fight of recession within an economy. Reduced Interest rates will stimulate an economy as there would be easy and cheap access to money, this easy access will encourage individuals to borrow more money from banks and other financial institutions and thus as a result an individual’s marginal propensity to consume would increase because of the acquisition of these cheap funds. Besides this, a reduction in the interest rates would definitely discourage savings as there would be reduced benefits and as a result, the individuals would prefer to spend more rather than to save hence the marginal propensity to save would reduce for an individual. The method of reducing the interest rates and stimulating the economy has been used by the Federal Reserve of the United States. The Federal Reserve showed a strong content in keeping the interest rates at a lower level and such reduced interest rate policy would be kept until the year 2013 in order to continue and improve the recessionary slump created by the economic meltdown (Censky, 2011). There are many different factors that determine both the level of unemployment and the level of consumer spending within an economy. The level of Aggregate Demand is considered to be one pivotal factor that determines the level of unemployment. If Aggregate Demand of products and services within an economy is low, unemployment may increase. This is because lesser amount of products and services would be required by the consumers and this would consequentially force the producers to fire extra or unwanted staff within their production facility in order to reduce costs of their products and services. This reduction is costs would be obtained in order to gain greater profits from the reduced sale of their products and services. Consumer spending on the other hand is determined by many different factors such as inflation, Unemployment, Economic growth expectation, government policies and many more. Inflation affects consumer spending in such a way that increased inflation causes the price levels to rise and this as a result reduces the individual’s purchasing power, hence decreasing the consumer spending. Unemployment, on the other hand leads to job cuts within an economy. This as a result restricts and individual to buy non-essential items, hence individuals prefer to save more rather than spending. An individual’s disposable income is also a major contributor towards his spending. Higher the disposable income, higher would be his expenditure. The consumer spending and saving levels within an economy keep on changing with the passage of time and due to some other changes within the economy. There are many factors that determine the spending and the saving level for an individual. An increase in the household income of an individual would enhance the purchasing power of that particular individual; this would consequentially increase his ability to spend. Whilst on the other hand, if an individual’s household income falls, it would result in a reduction of his expenditures. A fall in the income would also lead to an increase in the individual’s ability to save more than to spend. As a result, the propensity to save would increase. Income is one major factor that helps in determining the type of product or service produced within an economy. A low income economy is bound to receive low priced products because of their respective purchasing power. This kind of scenario is usually prevailing in most developing or under developed countries where the consumer income level is low and as a result of that, the producers of luxurious items take advantage of the low production costs by producing luxurious items in such under developed areas and exporting it to other developed areas in order to attain better price and greater profits. As for the under developed countries, they are given the same products but with inferior quality. Income elasticity of demand, on the other hand is also used as a measure to analyze the reaction of the demand of a particular goods with respect to the change being brought upon the income of different individuals. An increase in the income would lead to an increase in the quantity demanded for any particular good or service. This scenario is usually the other way round in case of an inferior good or service as an increase in the income would entice an individual to buy better quality product rather than an inferior one. Finally after analyzing all the issues, it can clearly be pointed out that unemployment has a severe negative effect on consumer spending and this scenario is currently a part of the entire global arena. The United States government is taking all the necessary steps in order to improve the situation and stimulate the economy. These steps include the reduction in the interest rates and the creation of new jobs within the country. The Labor Department explicitly reported of an addition of 200,000 jobs in order to improve consumer confidence within the economy and this increase in the confidence would definitely help in stimulating the economy of the United States of America (Dewan, 2012). References BBC. (2011). “US consumer spending figures disappoint”. BBC News Business. Retrieved from: http://www.bbc.co.uk/news/business-16317395 Bureau of Labor Statistics (BLS). (2011). News Release, US Department of Labor. Retrieved from: http://www.bls.gov/news.release/pdf/cesan.pdf Censky. A. (2011). “Fed to keep interest rates low until 2013”. CNN Money. Retrieved from: http://money.cnn.com/2011/08/09/news/economy/federal_reserve_meeting/index.htm Dewan. S. (2012). “U.S. Economy Gains Steam as 200,000 Jobs Are Added”. The NewYork Times. Retrieved from: http://www.nytimes.com/2012/01/07/business/economy/us-adds-200000-jobs-unemployment-rate-at-8-5.html International Conference of Labour Statisticians, & International Labour Organisation (ILO). (1982). The thirteenth International Conference of Labour Statisticians: International Labour Office. Retrieved from: http://www.ilo.org/public/english/bureau/stat/download/res/ecacpop.pdf Jacob. J. (2011). “Top Five Reasons for High Unemployment in US”. International Business Times. Retrieved from: http://www.ibtimes.com/articles/110575/20110209/us-jobs-unemployment-top-five-reasons.htm Sloman, J. (2010). Essentials of economics. Harlow: Financial Times Prentice Hall Wall Street Journal (WSJ). (2012). “Jobs, unemployment, consumer spending”. The Week in Charts. Market Watch. Retrieved from: http://www.marketwatch.com/story/jobs-unemployment-consumer-spending-2011-02-05 Washington Post. (2012). “Rise in US hiring boosts stock markets, but worries about European debt crisis sink euro”. The Washington Post with Bloomberg. Retrieved from: http://www.washingtonpost.com/business/markets/rise-in-us-hiring-boosts-stock-markets-but-worries-about-european-debt-crisis-sink-euro/2012/01/06/gIQA43UveP_story.html Read More