The Extent to Which Unemployment Is a Microeconomic As Opposed To a Macroeconomic Problem - Assignment Example

Explain the extent to which unemployment is a microeconomic as opposed to a macroeconomic problem, and discuss the relevance of this analysis for government policy to reduce the rate of unemployment. Name: Roll No: Class: Subject: Teacher: Date: 26th April 2009 University Explain the extent to which unemployment is a microeconomic as opposed to a macroeconomic problem, and discuss the relevance of this analysis for government policy to reduce the rate of unemployment. Introduction One important goal of microeconomics is to analyse market mechanisms, which establishes relative prices of goods and services and allocation of resources limited by nature among the alternative uses of these goods and services. Microeconomics steps in when markets fail to produce efficient results. Unemployment is a problematic area both from macroeconomic and microeconomic point of view. Unemployment remains the subject matter of macroeconomics until the allocation of resources by the government for growth oriented plans and programmes are productive to add to the employment generation and increase its level from the existing base. However, unemployment is not a straight subject as this is beset with various microeconomic problems of wages, skill, training, hours of work, welfare and myriad of employment dynamics. Therefore, labour economics deals with all these aspects to look into the details and finds solution (Sundram and Vaish, 1992). Description Unemployment is an important measure of the strength of the economy. A high unemployment rate generally indicates an economy in recession with few job opportunities, while a low unemployment rate points to an economy running at or near full throttle (Investor Glossary 2009). The principal aim of a government is to reduce the rate of unemployment in the economy by framing correct policies, encouraging growth of different sectors of the economy such as agriculture, industries, and services and by allocating resources into these sectors. The effort by the government ensures growth with rise in the GDP of the economy and the proportionate rise in employment (Barr, et.al, 2009). This is a straight a subject matter of macroeconomics. Besides this aspect, there are many other inter-related aspects that have indirect connection with the subject ‘Employment’. For example new technologies and lifestyle changes, which are likely to increase the number of temporary works, contractual works, and may add to the self-employed workers, can make it difficult to tackle unemployment problems. The problem of unemployment can be broader or be just local, urban or rural, seasonal or perennial. Each problem has to be tackled on different planks with different measures. South African labour market is beset with the problem of racial character and local wage problem (Fassler and Knight, 2001). Unemployment in Indian rural sector is vast with large number of workers lying idle. Government of India has to come with guaranteed hundred day’s minimum rural employment schemes to tackle this problem. Micro credits are provided to the rural people to enable them to raise small enterprises to remain employed. These are microeconomic problems in which, specific allocation of resources has been demarcated to the rural sector to solve the problems of unemployment. Unemployment has many other facets such as cyclical employment, which changes with the recovery and downfall in the economy. There are instances when employment pattern lag the business cycle as witnessed in early 1990s (Romero, et.al, 2008). The period exhibited jobless recoveries. In this period though there was recovery in the economy with increase in real GDP, employment growth started after 18 months of the end of recession. The government remained perplexed about the situation and could not frame the right policy to tackle it. In a study it is revealed that during the recessions in the past there were more losses of permanent jobs and lesser loses of temporary jobs (Barr, et.al, 2009). In case, the jobless recovery after recession there was strong need for reallocation of workers from one sector to another. There was weaker need for return of workers in the old jobs. These adjustments are a slow process but recovery in the economy is achieved faster. Government has active role to identify the problem, frame policies and launch schemes to redress the problems of unemployment during such periods. It is beyond the macroeconomics and is the realm of microeconomics. Question is how and why GDP and employment move in opposite direction? It sometimes occurs that with growth in the economy, labour productivity grows too but employment may not increase. The example of growth profile in the 1990s is a testimony to this fact that in the third quarter of 1990, the labour productivity grew at rate of 8.1% but employment growth rose only by 01% during that period (Kingdon and Knight, 2006). Another aspect that leads to divergence of growth rate and employment creation is due to the laboursaving technology that boosts manufacturing output that drives labour productivity very high and renders workers underemployed or unemployed because fewer workers can achieve the previous task. There is no creation of new jobs. Such people who go to unemployment stage have to migrate to other places or other sectors for new job and this transition has no negative effect on the GDP. The role of microeconomics is clearly visible here too wherein there is need to keep the workers afloat with old jobs with proper training or by creating new scopes outside (Romero, et.al, 2008). During Frictional, unemployment when workers are searching for new jobs or re-entering into new jobs unemployment practically does not exist as it is transitional period (Barr, et.al, 2009). In cyclical unemployment when economy dips into recession many who are employed have lesser hours of work though remain employed. They are underemployed. In structural unemployment, changes in technology demand for different skill may make some existing labour redundant and have to look in for different sectors for employment or may require immediate training in the new skill to fit with the new technology (Romero, et.al, 2008). Structural unemployment when the skill mix of the workers don’t fit with the employers skill mix demand results in unemployment Altering the skill mix according to the need of the employment needs specialised training, money, time and is not done overnight. It may require the attention of the policy makers to change in the training need of labor or other measures. This is a subject matter of microeconomics. Cyclical unemployment is a macroeconomic problem where inadequate demand follows as whole in the economy and requires strict monetary and fiscal measures by the government to tackle. Structural unemployment on the other hand is microeconomic problem where mismatch of labour skill is present and require overall change in the employment policies with measures like information, training, educational programmes, improvement in the mobility of workers and many others (Collier and Goderis 2009). Another problem in case of structural unemployment is the change in the pattern of wages in the workstation. Those who are mismatch in terms of skill have to leave the work for search of match of job in other sectors but who remain present in the work with matching skill demand more wages. This is a different microeconomic issue and need solution from different angle. The situation also demands for searching new skills from outside market to match with far better skill and reasonable wages. Growth in the sector often followed by demand for higher wages but higher wages need not necessarily increase productivity among workers. It is noted that when the Government increases the minimum wage, unemployment raises. While some workers with certain skills lose their jobs, shortages of other skills bid up the wages of workers’ with those skills (Miller, 2003). Govt. tries to influence the demand for labour so that more members of labour force are absorbed into productive avenues and thereby more employment is created (Collier and Goderis 2009). Govt policies have to be related with the rate of growth in output, and rate of employment. Objective of every development strategy of government is to increase the employment elasticity without depressing the growth rate of output. Growth strategy of the govt determines the employment elasticity. There may be trades off between the two objectives. The role of economist is to identify the key elements in the strategy that may minimize the trades off (Romero, et.al, 2008). The pattern of labour absorption depends upon the demand and supply factors in the labour market and also determines the rate and pattern of absorption of labour in the work process (Kingdon and Knight, 2006). The aggregate demand for labour must equal the aggregate supply of labour minus the unemployment existing in the market. Specific labour market policies of govt may be very relevant here. The objective of govt is multidimensional. The objective of raising new employment level in the economy may not reconcile with the objective of raising wages above the level in the free market. Since both are opposite. Govt may wish to alter the distribution of income of wage earners at least in the sectors in the economy that are growing (Barr, et.al, 2009). Govt generally accomplishes it through labour laws. That might conflict with other sector that is objective of maximizing growth in employment and equal growth objective. Microeconomics will be very relevant here to enable to identify and reduce level of unemployment. Another problem area is the international or export segment where inflation in wage cost is caused by the spurt in oil prices in the oil market. There was sharp and short-term changes in the wages and employment associated with the disturbances. After the oil prices slump the higher wages becomes a big problem and may lead to curtailment of employment. A study of labour market behaviour and macroeconomic policies such as fiscal, monetary and exchange rate is necessary along with microeconomic approach. Conclusion Thus, we note the role of microeconomics at every stage of unemployment problem for the government to find solution. As far as the growth in economy in terms of GDP causes proportionate rise in employment, there is no role of microeconomics (Mazumdar, 1989). However, the fact remains that the relationship between growth in the economy and unemployment is not that straight. There are microeconomic problems at every stage: jobless recovery increased labour productivity by advanced technologies, sect oral labour problems, lack of skill to match the work demand, shortage of proper training, information, education, racial treatment of workers, mismatch of demand and supply of workers, heightened wage demand caused by product prices spurt, not correct policies followed by government and so many others. Government has to be conversant about all these microeconomic problems in the sphere of unemployment and has to frame correct policies to rectify the problem for better growth in employment (Mazumdar, 1989). References Fassler, M., G. Kingdon, and Knight, J. (2001). “Transitions from Unemployment to Employment in South Africa”, mimeo: Department of Economics, University of Oxford. Kingdon, G. and Knight, J. (2006). “The measurement of unemployment when unemployment is high”. Labour Economics, 13 (3), 291-315. Mazumdar, Dipak. (1989). Microeconomic Issues of Labor Markets in Developing Countries: Labor Supply. Sundram and Vaish. (1992). Principles of Economics, 20th edition, London: Routledge. p. 35. Miller, Stephen M. (2003). ‘Jobless Recovery: The New Economy? In Business, 9, 14-20. Investor Glossary. (2009). Unemployment. Retrieved on 21st April 2009 from www.investorglossary.com/unemployment.htm Collier, Paul and Goderis, Benedict. (2009). Structural Policies for Shock-Prone Developing Countries. University of Oxford, Department of Economics: CSAE Working Paper. Barr, Abigail, et.al. (2009). Homo Æqualis: A Cross-Society Experimental Analysis of Three Bargaining Games. CSAE Working Paper. Romero, Roxana Gutierrez, Kimenyi, Mwangi S. and Dercon, Stefan. (2008). The 2007 Elections, Post-Conflict Recovery and Coalition Government in Kenya. iiG Briefing Paper. Read More