The Impact of Unemployment on the Economy - Term Paper Example

 Unemployment in the Overall Macroeconomic Environment Abstract Unemployment is a serious issue and impact of unemployment has a strong influence on various aspects of business and the economy as a whole (Mankiw). There are several aspects that need to be understood and this paper has dealt with the various aspects related to unemployment. The paper has dealt with the measures of unemployment, the costs that are involved due to unemployment, the relationship between labor markets and unemployment, and the types of disequilibrium and equilibrium unemployment. The paper has concentrated on this macroeconomic factor as the impact and essence of unemployment is high and can affect the overall economy to a great extent. Introduction: The success of a business relies on not only the own particular market and its own decisions, but also the macroeconomic environment it operates within. The macroeconomic environment has a direct affect on the profitability and success of a business. This paper aims at dealing with one of the most essential aspects of the macroeconomic environment of business, i.e. unemployment. This paper will deal with unemployment in detail and will include aspects like the meaning of unemployment, and the costs of unemployment. Also a focus will be on the labor markets and unemployment. The study will also touch upon the two main types of unemployment, i.e. Disequilibrium unemployment and Equilibrium unemployment. Here an attempt will be made to explain the two types of unemployment and the various subcategories of these will also be touched upon. However before moving on, it is essential to understand the meaning of a few terms like labor force, number unemployed, unemployment rate, and unemployment. Labor Force: This refers to the number of people employed plus the number of people unemployed. Number Unemployed: This can be defined as ‘those of working age who are [sic] without work, but who are available for work at current wage rates’. Unemployment Rate: This refers to a percentage expression of the number of people unemployed based on the labor force. Unemployment: “Unemployment is a status in which individuals are without job and are seeking a job. It is one of the most pressing problems of any economy especially the underdeveloped ones” (Economy Watch). a) Meaning: Unemployment can be expressed and presented in two ways, i.e. either as a number or as a percentage. For the official statistics, two main measures are used, these are as follows: Claimant Unemployment: This refers to the people who receive unemployment related benefits (Sloman and Sutcliffe). This mainly measures all those who receive the unemployment related benefits and claim the benefits to cover for their expenses until they have a job. Standardized Unemployment Rate: This is an unemployment rate that is used by the International Labor Organization and the Organization for Economic Co – Operation and Development (Sloman and Sutcliffe). Here unemployed refers to people of the working age and who are without work. b) Costs of unemployment: Unemployment leads to numerous costs and these costs do not only influence the person unemployed but others as well. There are three main costs that are involved with unemployment are as follows: i) The first and most obvious costs involved are that incurred by the unemployed themselves. The cost incurred is a direct financial cost and involves a loss of their earnings. This cost can be calculated as a difference between the previous wage of the individual and the unemployment benefits (Sloman and Sutcliffe). However there are several other costs that are involved as well and these mainly classify as personal expenses like stress related expenses due to the distress of loss of job. ii) The second cost involved impacts the family and friends of the individual unemployed. Being unemployed cannot be very easy and can lead to numerous issues for the person themselves and people around them as well. The increased stress and the distress that the unemployed individuals go through can lead to strained relationships and can in some cases also lead to domestic violence (Sloman and Sutcliffe). This has also been the cause for families splitting up as well. iii) The third costs involved are the broader costs to the economy. Unemployment causes a number of other issues as well. Firstly it is essential to note that the unemployment benefits are paid, in most cases, by the taxpayers. The cost of unemployment, as mentioned earlier, is not only felt by the individual but by others as well (Sloman and Sutcliffe). The main cause for this is that, unemployment represents a loss of output. In simpler words, the actual output is lower than the potential output. Hence there are several others who are affected by the unemployment. These include: Firm: The firms have been noted to face a loss of profits as well, as the output is lower than what it could have been in case of full employment (Sloman and Sutcliffe). The government is also affected by this as the amounts of taxes that the governments receive are also lowered as the individuals do not pay income taxes (Sloman and Sutcliffe). Also the individuals who are unemployed tend to spend lesser and thereby pay less VAT and excise duties. Also the other workers face a loss in their pay as they could have otherwise earned due to the higher national output (Sloman and Sutcliffe). Apart from the above mentioned points, it is also essential to note that the long term involuntary unemployment can cost much higher than any benefits. Due to the unemployment, there are high chances of high levels of de – motivation, deskilled people and this can lead to high levels of economic and social problems (Mankiw). c) Labor Markets and Unemployment: This section deals with the main causes of unemployment and these have been divided into two broad categories, as discussed below: i) Disequilibrium unemployment: This refers to the unemployment that arises when the real wages in the economy are higher than the equilibrium levels. For a disequilibrium to occur in a market there are two main conditions that need to be met: a) The aggregate supply of labor (i.e. ‘the total number of people willing and able to work at different average real wage rates’ (Sloman and Sutcliffe)) should exceed the aggregate demand for labor. Aggregate demand for labor can be defined as ‘the total demand for labor in the economy at different average real wage rates’ (Sloman and Sutcliffe). b) The wages must not fall to the equilibrium level very easily. There are three main types of disequilibrium unemployment, these are as follows: Real Wage Unemployment: Trade unions utilize their monopoly power to drive the wages above the market clearing levels. This is a major cause for the denunciation of the national minimum wages. This, i.e. the real wage unemployment, however can be removed if the real wage rates are reduced. However it is important to note that even if the government is able to reduce the real wage rates, the customer expenditure would also reduce and this will lead to reduced demands of the labor as well and thereby there might not be a fall in the unemployment at all (Sloman and Sutcliffe). Demand – Deficient or Cyclical Unemployment: This refers to the disequilibrium that is caused due to a fall in the aggregate demand and relatively no or very less fall in the real wage rate. This can also occur when the economy has a constant run of below the full capacity and the labor markets are continuously not in equilibrium (Mankiw). Growth in Labor Supply: If there is a rise in the aggregate supply of labor and the aggregate demand for labor remains the same this will lead to growth in labor supply. This however is not a serious issue of unemployment and in some terms is relatively a good option as the sudden influx in the labor markets can lead to higher levels of jobs being available to the school leavers and others each year. ii) Equilibrium unemployment: This is when there are numerous vacancies in some parts of the country, however there is an excess of labor in other parts of the country (Mankiw). Again, similar to the disequilibrium unemployment there are three main types of equilibrium unemployment, these are as follows: Frictional (Search) unemployment: Sloman and Sutcliffe have defined this as ‘the unemployment that occurs as a result of imperfect information in the labor markets. It often takes time for workers to find jobs (even though there are vacancies) and in the meantime they are unemployed’ (Sloman and Sutcliffe). Structural unemployment: This on the other hand is when there is unemployment due to the changes in the demand and supply within an economy. In numerous cases the people who are made redundant in one part of the country take time to find another job in another part of the country, although there are several job vacancies available. There are a few causes for these which include, a) any change in the pattern of demand, b) changes in terms of method of production or technological unemployment. It is also essential to note that this form of unemployment occurs in particular regions and hence is regional unemployment (Mankiw). Seasonal Unemployment: This is a very common form of unemployment and is mainly caused due to the seasonal requirements of employees within companies. As defined by Sloman and Sutcliffe, ‘Unemployment associated with industries or regions where the demand for labor is lower at certain times of the year’. One of the common areas with this issue includes the holiday sector and in a few FMCG sectors like Ice Cream industries. Conclusions: In conclusion it is clear that unemployment has a major role in the overall macroeconomic environment of the businesses (Mankiw). A few of the major elements that people tend to forget is that if more people are unemployed the number of people paying taxes is much lower and the amount of money available to spend is also relatively lower. With lower expenditures the taxes earned by the government is also lower and thus the overall money available in the economy is also relatively much lower. Hence it is essential for a balance to be created within an economy and to reduce chances of deflation of the economy. There are several books that provide excellent information on this topic and a few of the possible books that can be referred are as follows: a) Mankiw, N. Gregory. Macroeconomics. Worth Publishers, 2006. b) Sloman, Jack and Mark Sutcliffe. Ecnomics for Business, Third Edition. London: Pearson Education Limited, 2004. c) McConnell, Campbell and Stanley Bruce. Macroeconomics - 17th Edition. McGraw-Hill/Irwin, 2006. d) McConnell, Campbell, Stanley Bruce and Sean Flynn. Macroeconomics - 18th Edition. McGraw-Hill/Irwin, 2008. Works Cited Economy Watch. Unemployment. 2009. 18 October 2009 . Mankiw, N. Gregory. Macroeconomics. Worth Publishers, 2006. Sloman, Jack and Mark Sutcliffe. Ecnomics for Business, Third Edition. London: Pearson Education Limited, 2004. Read More