The Time Lag between Unemployment and Job - Essay Example

Number: Business Economics GM545 Part 2: Chapter 16, Question 5 The time lag between unemployment and job in an individual’s career marked by ‘searching for a job’ or transitions phase involved in change of jobs, called as frictional unemployment, is very critical. When a company is searching for the right person to a job, simultaneously several right persons might be searching for a similar job. This mismatch is caused by multifarious factors ranging from location, work-life imbalance, lack of proper dissemination of information and communication gap. Frictional unemployment is a source of concern to the workers, companies as well as economy in a larger perspective. When demand and supply situation in a country is unfavorable to the employers, they would prefer to compromise and give training to the available personnel rather than spend time and resources in search of ‘ideal match’, to avoid production loss. Gronau stated: “Since the length of service is directly related to the level of unemployment, one would expect wage demands (and hence the change in general wage rate) and unemployment to be inversely related” (290). If the pace of economic growth is robust, the increase in demand mitigates the effects of frictional unemployment in general. Development of transferable skills by a person could ensure transfers within the same company to other departments or make change of job easier and counseling facilities need to be strengthened. Uniformity in dissemination of information with regard to the jobs available, the attributes necessary and the experience required in relation to them is very important for proper understanding in identifying the appropriate opportunities without any difficulty. Though the standardization could not be achieved completely in this respect in view of multiplicity of disciplines, grades and specialization, common parameters relating to jobs in a particular category acceptable to most of the employers or industry associations and understandable by majority of the workers would improve the situation considerably. In most of the cases relocation choices are not fully explored both by the employers or employees to the disadvantage of both. Moving cost to the employee and recruitment and training cost to the employer play an important role in making strategic management decisions. If the views of the employer and employee converge in this respect, solution could be reached easily. Diamond stated that “[t]he rate at which workers are offered jobs with different moving costs depends on the decisions of other workers as to which jobs to refuse” (798). If the procedure for exploring relocation options and possibilities is formalized within the organization it will mitigate hardships to employers and employees. Providing assistance to the employees, say by giving employment to the spouse or transfer to the spouse’s place of work, in overcoming their personal difficulties would go a long way in cementing the employer-employee relationship. Providing facilities to the workers for recreation and sports by the management would enhance their sense of belonging and increase their productivity. Recognition of their talents in various spheres encourages them to pursue their activities close to their heart. This will also increase their job satisfaction. Frictional employment is therefore a welcome feature in an economy which improves flexibility in employment and underlines the importance of employer employee relationship both of which are essential for economic growth. Chapter 16, Question 6 Inflation is a double edged sword. Mild inflation is a feature of economic growth. Monetary policies of central bank of a country aim at taming inflation through adjustment in bank rate and supply of money without impairing growth process. When economy is overheated the fiscal and monetary policies aim to regulate the pace of economic growth to keep inflation under control. Rapid pace of economic growth results in higher level of employment generation leading to higher consumption and production of goods. Increase in the rate of this growth leads to increased consumption resulting in more demand for products. The need for increasing supply of goods in tune with rising demand causes investments in establishment of new manufacturing facilities by private enterprises which increase opportunities for further employment in economy. This is facilitated by mobilization of savings in the system. The multiplier effect caused in this process needs to be regulated for a sustainable economic growth. The fiscal policies of a government aim at balancing growth and inflation through taxation and government spending. However, for a government to intervene effectively in the economic process in a situation of economic slowdown, accumulated fiscal deficit needs to be at lower level with debt to GDP ratio and balance of payments position comfortable. Otherwise, increase in the interest rates further might be ineffective in curtailing inflations which arise due to several factors. The monetary measures could be counter-productive by affecting economic growth of the country and lead to stagflation, a situation where inflation co-exists with stagnation. Declining purchasing power parity of the currency makes imports (especially oil) costlier leading to hyperinflation. Clarida and Gertler observed that “[b]y taking preemptive steps to avoid high inflation, a central bank can reduce the likelihood of having to engineer a costly disinflation. Second, a central bank that establishes a clear commitment to controlling inflation may be able to maintain low inflation for far less cost than if it did not have this reputation” (363). Increase in money supply and reduction interest rate to avoid recession and stimulate economic growth could lead to mismatch of money available in the system and output in economy. This will lead to cost overrun in government projects requiring further creation of money which increases velocity of money. When a government resorts to printing money as an easier option to borrowing or taxation, this could result into crisis with the people losing confidence on currency and buying goods for future use by paying higher prices since money as a store of value is significantly undermined. Due to deterioration of monetary base, hyper inflationary situation takes a very long time for the economy to cool down and bottom out. Bernholz stated that “from the historical evidence presented that the long-term tendency of currencies towards inflation depends mainly on the monetary regime or constitution” (10). Hyperinflation is very complex in nature with several factors relating to economy and international phenomena at interplay makes it more unpredictable and hazardous. Since savings loses its worth very fast hoarding of assets by people increases the prices of the real assets further. Chapter 26, Question 8 Exchange rate refers to value of one currency relative to another. The price of a currency in relation to another currency could be determined either by fixed exchange rate or floating exchange rate basis. During the era of gold standard, currencies were pegged to gold. In a fixed exchange rate mechanism, the prices of currencies are generally pegged to US Dollar and the implication is that the rise and fall of the currencies is linked to rise and fall of US Dollar. The Central bank of the country regulates the movement of exchange rate in tune with the movement of US Dollar by buying and selling the country’s currency through market operations. The official exchange rate could be revised by way of devaluation or revaluation depending upon the economic conditions and the availability of foreign exchange reserves. Adoption of fixed exchange rate ensures stability in value of the currencies in the international trade. Stability in exchange rate is important for keeping inflation under control within the country. The element of fluctuations in the value of currency is not in the control of the businesses and industries volatility in exchange rate increases risks and leads to uncertainties in business. The competitiveness of the country’s exports in the international markets increases when the local currency remains undervalued. Maintenance of fixed exchange rate involves imposition of several restrictions on foreign exchange transactions. This will lead to black market operations in foreign exchange. The question of devaluation would create a panicky situation in the foreign exchange markets. There are several advantages attached to the system of fixed exchange rate. However, in the long run it is very difficult for a Central bank to manage the system. Floating exchange rate is determined by demand and supply conditions prevailing in the markets for the currencies. Most of the developed countries and developing nations are adopting floating exchange rates where exchange rate is determined based on the demand and supply situation. Self-correction mechanism is inbuilt in the system, and it takes place automatically under floating exchange rate mechanism. For example when US Dollar becomes stronger against the local currency, the imports becomes costlier and the local goods are substituted for imported goods which in turn reduces the demand for US Dollar. Increase in demand increases employment and output locally. According to Devereux and Engel, “floating rates may do a better job of stabilizing output than fixed exchange rates but still may not be optimal. For one thing output may be stabilized by flexible rates but consumption may be destabilized. But, a further important feature of the model is that the choice of exchange rate system may actually influence the average levels of consumption and output, not just their variances” (2). In the flexible exchange rate system, the central bank intervenes only under exceptional circumstances to ensure stability in the markets and avoid inflationary pressures in economy. This relieves pressure on the part of the central bank on day-to-day basis which increases efficiency in its monetary control operations. Works Cited Bernholz, Peter. Monetary Regimes and Inflation: History, Economic and Political Relationships. Massachusetts: Edward Edgar Publishing Limited, 2003. Print. Devereux, Michael B., and Charles Engel. “Fixed vs. Floating Exchange Rates: How Price Setting affects the Optimal Choice of Exchange-rate Regime.” Working Paper 6867, National Bureau of Economic Research, Cambridge, December 1998. Web. Clarida, Richard H., and Mark Gertler. “How the Bundesbank Conducts Monetary Policy. “ Reducing Inflation: Motivation and Strategy. Ed. Christiana D. Romer and David H. Romer. University of Chicago Press, 1997. 363-412. Print. Diamond, Peter, A. “Mobility Costs, Frictional Unemployment, and Efficiency.” Journal of Political Economy, 69. 4 (August 1981): 798-812. Print. Gronau, Reuben. “Information and Frictional Unemployment.” The American Economic Review, 61.3 (June 1971): 290-301. Print. Read More