Macro and Micro Economics - Essay Example

? Compare and contrast alternative views on the nature and possible causes of unemployment and evaluate the effectiveness of demand and supply management policies to combat it Name Course name Course instructor Date of submission Compare and contrast alternative views on the nature and possible causes of unemployment and evaluate the effectiveness of demand and supply management policies to combat it Unemployment can be defined as the activity of people being out of employment without their own wish. Unemployment is mostly involuntary that is the person was employed before but is now out of work without his or her wish of being out of work (Walters, 2000;12). This perspective implies that the person though out of job is actually looking for one but the job is currently unavailable. According to Gupta’s (2004; 31) definition of unemployment, unemployment cannot be defined as every person who is not engaged in productive activity. According to him there are people who are sick and children who are too young to work but this does not mean that they want to engage in any worthwhile activity because either they cannot find one or they do not want to engage in one; this means they cannot be classified as being unemployed therefore the correct perspective of unemployment would be the number of productive workforce that are involuntary out of work. Most of the common unemployment forms are brought by the lack of demand of labour in most of the companies in any given economy. Unemployment can be divided into many categories with the first group being Voluntary while the second type of unemployment will be involuntary (Lindbeck, 1993; 77). The said group can also be divided further into smaller groups depending on the cause of unemployment. When it comes to voluntary unemployment one of the major causes is frustrations; when a person fails to get the coveted job for a long period of time the individual might opt out of the work force, this is done in order for the person to avoid embarrassment and also the stress associated with the process of looking for a job. Therefore the person can be classified to have left the work force and employment through frustration thus unemployment through frustration. Another cause of voluntary unemployment is when the person has been working at a particular firm and due to structural change the company chooses to pay some employees in order to leave the job on a good will basis (Asimakopulos, 1991; 123). In terms of involuntary unemployment there exist different categories with the most common types being classical, structural or mismatch, frictional also known as turnover and cyclical types of unemployment (Anderson, 1977; 29). In cases where the wage rates are not flexible there will be a further cause of unemployment called the wait. Cyclical or demand deficient type of unemployment refers to a situation where the rate of employment is entirely dependent on employment rates. According to Gillespie (2007; 31), a slow demand throughout the economy leads to deficiency. Case in point is where there is a recession or there is a negative GDP growth. Whenever there is a negative demand or a low demand for goods and services then the demand for labour will be low therefore less employees will be needed thus more unemployment. Keynesian Theory falls under the cyclical type of unemployment; Keynes (1930) explains that in the short run, productivity activities are influenced by the total spending in the economy which is the summative demand (Hein, 2011;189). This does not mean that the total spending of an economy is equal to the total productive capacity of the economy which is the summative supply. In its place it is subjected by a multitude of aspects and every now and then performs unsteadily, touching production, employment and inflation. In the structural unemployment, it transpires when the structure of economy is altered (Snower, 1997; 64). Case in point can be where an industry loses its international competitiveness with the arrival of new global competitors. The industry will decline because of the competition and therefore the people employed in the particular industry will lose their jobs. After being unemployed the affected individuals will have quite a difficulty in finding another alternative job or employment as they might be possessing wrong skills to work in other industry in the end the unemployed individuals might need to undergo retraining before getting employed again. The turnover or frictional type of unemployment is mainly instigated by the individuals leaving one job in order to find another (Filc & Kohler, 1999; 28). This becomes a problem if the individual does not find the job very quickly or easily. Many people normally pass through the frictional period of unemployment but it is not a cause of great concern unless the job is not found and the individual is stuck for quite a very long time. When one stays for a long time without finding a job, it presents a challenge when one wants to get re-employed. According to Gupta this sort of unemployment occurs in most of the developing countries and during recession than otherwise. This can be explained by the poor pay in the jobs individuals are working in and therefore necessitating the employees to look for better job opportunities and by doing so they quit one job only to realize that getting the next job is an uphill task. Classical real wage unemployment is also a common cause of unemployment. Under classical unemployment the wage remunerated is normally too high than the equilibrium (Filc & Kohler, 1999; 41). When such a situation occurs there will be more than enough supply of labour as most people will want to work at a particular industry because of the high real wage rates. This high wage rates might be caused by the employees demanding high wages even if the prices are falling at any given moment. When the said employees refuse nominal pay cuts it leads to a high wage rates. Furthermore in some cases, the trade unions are solely responsible for the high wage rate as they push for the employees to get the high wages in return most people will be attracted to the kind of job that returns good wages and in the end the job market will be saturated with excess labour. The theory of unemployment under classical perspective takes assumption that the employment world will behave as elaborated in the supply and demand model whereby the interface of market forces set the balance wage rate and employment therefore unemployment can only subsist when something gets in the technique of market forces. For all the factors to be considered for a lower unemployment rate, the natural rate of unemployment has to be looked after. This basically refers to the lowest level of unemployment that an economy can hold onto devoid of rising rates of inflation. This will wholly rely on particular economic impacts like the minimum wage legislation, the influence of trade union organisations and mobility limitations between jobs. Therefore, it means that unemployment cannot be exclusively reduced by just mounting demand as the outcome will be a high inflation rate. The demand and supply management in relation to unemployment can be divided into two categories mainly the demand policies and also the supply policies as each of the said factors affect the unemployment differently. The demand policies mainly affect cyclic or demand-deficient type of unemployment and this according to Gupta, expansionary monetary and fiscal policies will be appropriate to tackle the issue. In most situations with recessions, the Aggregate Demand (AD) is always falling short of Aggregate Supply (AS). When it happens most people will lose employment but easy fiscal and monetary policies will lead to an increasing AD and therefore real income and employment will be raised (Filc & Kohler, 1999; 31). Demand is just like a car with a powerful engine in terms of growth and once the car has no fuel the engine will stop just like an economy stops with low AD therefore it has to be refueled for it to continue with the journey and therefore growth will be sustained. If companies continue producing more goods and services there will be a surge in the demand for workers and staff and this will reduce the cyclic unemployment. With a high AD and good growth in terms of economy there will be very few organisations going bankrupt and thus few jobs losses. Keynes (1930) also supported this notion of expansionary fiscal and monetary policies arguing that whenever there is a recession, capital and labour resources are always idle and hence there should be an intervention to create extra demand and thus curtailing the unemployment (Lipsey & Chrystal, 2011;74). When it comes to unemployment due to supply policies they include structural, frictional and also the classical or real wage. With the supply policies, their basis is not to accentuate the AD instead they try to look into ways of rising above the limitations of the labour market and decrease unemployment originated by supply side factors. Some of the policies will include: Education; it will be of utmost value for the supply policies. Education always inculcates the sense of responsibility and poise for labour. It also conveys knowledge of the labour markets and other related matters. Relevant education not only eradicates the skill matching issue but also trim down the barriers to mobility. Training is also of major importance as it mainly targets the unemployed getting new skills which will come in handy when they are looking for jobs in fast developing industries. Retraining thus will help in eradicating structural unemployment especially since it is on the rise partly because of specialisation and globalisation while education will be helpful in reducing all kinds of unemployment both natural and all the others. Infrastructure development will also play a major role in reducing the unemployment rates. By developing the transport, communication network, education, water and power resources, health and many other facilities will greatly ease the mobility especially in the rural areas thus reducing the location barriers and boosting the rural area industrialization and hence the area will be developed. This in turn implies that the unemployed will get jobs that are newly created and thereby cutting down the rates in the underdeveloped regions enhanced by the philosophy of bringing the job to the worker. In special cases even the workers who migrate to areas with high employment rates, the government can chip in and help them financially. By improving the industrial relations, the power of the trade unions might be taken care of. The trade unions can be utilized in a good way whereby they can advocate for no discrimination when it comes to employing workers while at the same time whenever they require a hike the companies can clarify how high wages will impact on the industries and even if done it should be of higher wage above the labour rates (Lipsey & Chrystal, 2011; 76). Imperfect information concerning a job or even the wages on the particular job might lead to unemployment therefore dissemination of information will be necessary as it means that the time spent between collecting the information and disseminating is reduced and therefore the frictional unemployment is low as the time spent between job separation and finding another job is short. References Anderson, D. J. (1977). Economics. London, Macmillan. Asimakopulos, A. (1991). Keynes's General theory and accumulation. Cambridge [England], Cambridge University Press. Filc, W., & Kohler, C. (1999). Macroeconomic causes of unemployment: diagnosis and policy recommendations = Makroo?konomische Ursachen der Arbeitslosigkeit. Berlin, Duncker & Humblot. Gillespie, A. (2007). Foundations of economics. Oxford [u.a.], Oxford Univ. Press Gupta, G. S. (2004). Macroeconomics: theory and applications. New Delhi, Tata McGraw-Hil Hein, E. (2011). A modern guide to Keynesian macroeconomics and economic policies. Cheltenham, Edward Elgar. Lindbeck, A. (1993). Unemployment and macroeconomics. Cambridge, Mass, MIT Press. Lipsey, R. G., & Chrystal, K. A. (2011). Economics. Oxford, Oxford University Press. Snower, D. J. (1997). Unemployment policy: government options for the labour market. Cambridge [u.a.], Cambridge Univ. Press. Walters, W. (2000). Unemployment and government: genealogies of the social. Oakley, Vic, Cambridge University Press. Read More