Causes and Effects of Unemployment on the Government - Essay Example

? Causes and Effects of Unemployment and Examination of Government Policies to Reduce it. Unemployment The definition of Unemployment, as set out by the International Labour Organization is the situation, in which people who are prepared and capable of work, having keenly searched work in the last 4 weeks, are not getting a job (Politics.Co.Uk, 2011). However, people who are either not interested or capable of working are defined as “economically inactive” and are not incorporated in the measure of unemployment. Unemployment is an indicative feature of an economy which is in a stressed condition, with resources not being utilized in an efficient manner and supply from the labour side surpassing the demand from the employers in the industry (Hardill et al, 2001). There are four major categories of Unemployment: Cyclical, Classical, Frictional and Structural (Politics.Co.Uk, 2011). Each of these categories of unemployment has different roots. Cyclical unemployment is mainly linked to variations in the business cycles. It often takes place when the economy is passing through a recession. In such a phase, the demand for goods and services decreases in the economy, which results in firms cutting down on output and laying off workers. This is considered to be the chief cause of Unemployment. The 2007-08 global recession resulted in soaring cyclical unemployment in the United Kingdom with the unemployment figures going past 2.5 million in May 2010, the highest for almost two decades (Kornacki, 2011). The second important category of Unemployment is Classical unemployment. It is also known as Real Wage Unemployment. It takes place when an attempt is made to synthetically keep the wages above the equilibrium formed between the supply and demand curves. For instance, economic institutions such as a strong trade union may influence the movement of wages beyond the equilibrium resulting in surplus labour supply and thereby causing Classical Unemployment. Frictional Unemployment is the third category of Unemployment. This type of unemployment is related to people being in between jobs. It is considered to be the time phase between jobs or when a worker is switching from one job to another. It is believed to be an everlasting phenomenon in the economy as there are always employers finding workers and workers searching jobs. Mismatch between workers and employers often occur in the economy due to disparity of interests between them with regard to factors such as payment, location, mind-set, etc. The last major category of Unemployment is the Structural Unemployment. It is usually caused due to mismatch of skills and location. For instance, there may be jobs available which require certain type of skills; however, if the workers do not possess the appropriate skills, then this results in unemployment. Structural Unemployment in the coal mining industry of the United Kingdom rose sharply in the early 1980’s as new technology in the form of Nuclear energy came into the picture. In the case of a mismatch of location, jobs may exist in some other part of the country but workers might not be able to move there due to personal or other reasons (Himmelweit et al, 2001). There are benefits as well as costs of unemployment. The prime benefit associated with this phenomenon is that it keeps the inflation down, which too has severe effects on the economy. The other benefits in the view of the employers are that workers are available to employ; and they would work hard as well, due to the fear of getting unemployed. There are mainly two types of costs of unemployment, individual and social. With regard to the individual, unemployment paralyzes the individual’s ability to tackle financial requirements related to oneself or one’s family, resulting in stress and diseases which can lead to severe depression as well. Socially, higher unemployment means lack of utilization of economic resources, particularly labour. Moreover, unemployment also leads to social evils such as thefts and robberies as people who do not have jobs are forced to commit such crimes in order to meet their daily needs (McLaughlin, 1992). In the recent times, United Kingdom has been on the forefront of bearing these costs due to the towering unemployment rates caused by the 2007-08 Recession. The two main kinds of policies which can be assumed by the Government to reduce or control unemployment are: Demand-side and Supply-side. The Demand-side policy primarily concerns with the measures of tax cuts and interest rate cuts. Tax cuts by the government tend to increase the disposable income of the people. With lower taxes, consumption of goods and services by the population increases, which leads to higher Aggregate demand. As Aggregate demand increases, the Real Gross Domestic Product (GDP) also begins to rise which consequently results in increased activity in the firms operating in the economy, thereby, enhancing the demand for the workers. This automatically boosts the progress of the economy. This measure is incorporated in an expansionary Fiscal Policy which is adopted by any government and can be utilized to reduce unemployment by generating extra demand during an economic downturn. However, this policy is contingent to several other factors in the economy (Macdonald, 1999). The UK government has recently supported tax cuts as the Prime Minister, David Cameroon announced that tax cuts will aid in re-establishing confidence among the businesses operating in the United Kingdom. He announced a cutback in taxes for small businesses as well as corporation taxes from 26% to 23% (Tyler, 2012). Though it would have been much better for the economy if this measure had been taken by the UK government earlier, nevertheless, this can be seen as a step in the positive direction taken by the government as, through reduction of taxes; the rising unemployment in the country would certainly fall, thus supporting the Demand side policy. The second measure related to the Demand side policy is a reduction in the interest rates which diminishes savings, enhances effective disposable income of the people, improves consumption, thereby increasing the Aggregate demand. A similar phenomenon takes place as described earlier in relation to tax cuts, with increased GDP and increased economic activity augmenting the demand for workers. This measure of the government is a part of the Monetary Policy. This policy too is dependent on various other factors and most importantly, the monetary policy of a country is set by the Central Bank. In United Kingdom, the Bank of England decides the Monetary Policy and therefore, the interest rates. For over last two years, the base rate set by the Bank of England has been a very low 0.5%. This has mainly been in response to the last recession and in order to decrease the unemployment figures which have risen tremendously during the last few years. Recently, David Cameroon also announced further interest rate cuts along with tax cuts to reinstate self-belief in the economy of United Kingdom, thus aiming to lessen unemployment rates in the country (Tyler, 2012). Again, this is a constructive measure taken by the Bank of England in conjunction with the government, as it would increase the demand of the goods and services produced in UK; consequently, reducing unemployment and its far reaching consequences at least in the short run. Therefore, tax cuts and interest rate cuts, which are the two important measures of the Demand-side policy, help in cutting down Classical and Cyclical unemployment. These measures are particularly useful in times of economic downfalls and recessions. Demand side policies have been widely acknowledged and supported by the UK government so that they could help the country come out of the economic pit in which the country had fallen ever since the 2007-08 Recession. The Supply-side policy related to Unemployment is mainly based on boosting the supply of labour force to the economy. It involves improving the capabilities of the workers so that the labour supplied to the employers is skilled and fulfils their requirements on all grounds. In order to enhance the human capital of the labour and develop their knowledge, there are primarily two measures which can be employed by the Government with respect to the Supply-side policy. They include Training Programmes and Disseminating Job Information. Training Programmes launched by governments have been very popular in current times as they aim at developing skilful workforce which can meet the necessities of the various employers operating in the economy. Numerous firms run in the industry, each of which has its own specific demands and policies with reference to the employment of workers. After performing a thorough screening process during the recruitment juncture, employers select only those candidates who they think, would be able to work in their company’s environment and deal with the tasks assigned to them. As a result, not all the workers are able to stand up to the skill requirements of the employers, and only those who do, are picked by them for their companies. Consequently, this kind of meticulous selection process in which only the most skilful are chosen leaves quite a few unemployed people in the economy. The government implements its policy to facilitate such individuals by initiating different training programmes for different industries designed to educate the unemployed individuals about the basics of work, code of conduct, use of machinery, latest technological tools and techniques along with fundamental as well as advanced skills required to survive in the industry. These training programmes have turned out to be productive teaching courses for many unskilled workers as they are able to develop expertise and proficiency in their respective fields after being groomed under such programmes. Apart from training programmes, it also involves improving overall education in the country (Buxton, 1998). This measure is highly favoured by the UK government as recently, ?83 million were allocated to 14 London Colleges by The Department of Innovations, Universities and Skills (DIUS) to help unemployed people attain skills and abilities. Moreover, University for Industry (UFI), now under LDC also plays a crucial role in providing skills to the unemployed people in the United Kingdom (LearnDirect, 2012). The above mentioned measures adopted by the UK government over the years exhibit the importance which the government has always attached with regard to training and education. The second Supply-side measure which is very popular and adopted by the UK government is with regard to disseminating information about jobs among those who want to work. This measure is also designed to improve the supply of the labour force to the industry, thereby contributing to the progress of the economy. It often happens that people who are willing to work are unemployed because they are not being able to find an appropriate job. This occurs because such workers are not well-informed about the job opportunities that exist in the market. Consequently, this measure involves creating awareness among the potential workforce about the vacancies that are present in the economy. The UK government has set up quite a few institutions through which the unemployed people can seek information related to jobs. “JobCentre Plus” Office is a national body of the UK government with divisions in several areas of the country. It offers counsel and information on the subject of job opportunities and also guides in attaining job-seeking benefits. The government website of UK also provides an opportunity to the unemployed people to explore jobs with reference to category and place. The Supply-side policies tend to reduce Structural and Frictional Unemployment (Adams et al, 2003). Most of the UK governments have been consistent in providing training and job information to the unemployed people of the country. This also shows that historically, the government’s primary emphasis has been on Supply side policies in order to reduce unemployment. This is mainly because of the long term positive outcomes associated with the Supply side policy in contrast to the Demand side policy which tends to yield short term results. On summarizing the effectiveness of both the types of policies adopted by the UK government, it can be said that the Supply side policies which cater to training and job information have proved to be very successful in the long run, whereas the Demand side policies have always been used by the government for bailouts from increasing unemployment usually in times of crisis. There is a need to develop a balanced fit between the two kinds of policies so that economic equilibrium prevails in the country and unemployment is reduced in a uniform and consolidated manner. Unemployment, a stressing phenomenon for an economy, can be Cyclical, Classical, Frictional and Structural. Cyclical unemployment, which is the most widespread form of Unemployment, is caused due to economic slumps; as it happened in the United Kingdom after the 2007-08 Recession. The costs of unemployment can severely affect the individual as well as the society; as increasing rates of suicides, depression and crimes were witnessed by the United Kingdom after the recent recession. The Government can either adopt Demand-side or a Supply-side or both policies to control unemployment. The Demand-side Policies aim at tax cuts and interest rate cuts, as favoured by the recent UK government. The Supply-side Policies adopted by the UK government involve providing training and information to the unemployed. Bibliography ADAMS, J., ROBINSON, P., & VIGOR, A. (2003). A new regional policy for the UK. London, Institute for Public Policy Research. BUXTON, T., CHAPMAN, P. G., & TEMPLE, P. (1998).Britain's economic performance. London, Routledge.  HARDILL, I., GRAHAM, D. T., & KOFMAN, E. 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[online] Available from: http://www.politics.co.uk/reference/unemployment[Accessed 29 January 2012]. TYLER, R. 2012. David Cameron says tax cuts will restore business confidence. The Telegraph, 5 January. Available from: http://www.telegraph.co.uk/finance/yourbusiness/8995757/David-Cameron-says-tax-cuts-will-restore-business-confidence.html[Accessed 29 January 2012] Read More