Causes of Unemployment and the Economic Schools of Thought - Coursework Example

Introduction Unemployment may be construed to refer to the situation where an individual is qualified, available to work, looking for a job but he/she lacks a job. It may be voluntary or involuntary. Voluntary unemployment refers to the situation where an individual deliberately chooses to remain unemployed maybe because he/she desires to refrain fro work or is looking for better opportunities among other reasons. Unemployment has always been a concern for most countries because of its economic implications (Artis & Nixson, 2007: pp121-127). The prevalence of unemployment distinguishes the strong and weak economies with the former having low prevalence and the latter high unemployment prevalence. Unemployment prevalence is normally measured with what is normally termed as unemployment rate which is defined by expressing those out of labour force as a percentage of those who are in the force. X 100 More often than not the unemployment rate has been used in economic studies where it may be applied to measure the state of macroeconomics. This paper seeks to argue out the proposition that unemployment within the labour market is primarily voluntary. Causes of Unemployment and the Economic Schools of Thought A number of causes for unemployment have been floated and these causes depend on the economic school of thought. The Keynesians and monetarists more often than not disagree on the causes of unemployment and as such they also disagree on the best policies to address the issue of unemployment. For instance, the monetarists believe that by controlling inflation, economic growth and investments will be enabled and these will consequently lead to reduced unemployment rates. How do Keynesians address the issue of unemployment? The Keynesian believe that the best way of addressing unemployment is to smoothen out the business cycles by the manipulation of the aggregate demand (Hillier, 1991: pp157-159). Economic theories aside, the type of unemployment is purely dependent on the goods market situation. If for instance the sales are strictly tied to demand then the Keynesian type of unemployment results. However, if there is a limited production capacity then the ensuing unemployment is termed as classical unemployment. The main types of unemployment include but are not limited to Frictional Unemployment, Seasonal Unemployment, Cyclical (Keynesian) unemployment, Structural unemployment and Classical unemployment among others. Frictional unemployment results when one transfers from on job to another. This is the same unemployment type experienced by the fresh graduates who are searching for a job. Seasonal unemployment is caused by the fluctuations in workforce demands in the labour market. Some industries experience patterns of workforce demand which vibrates between high and low demand for workforce depending on the production dynamics. As such, when the industries are at their peak, the rate of unemployment is low (high employment rates). The opposite of this is also true. Thus, the kind of unemployment that results when the industries are at their off peak (as far as demand for workforce is concerned) is called seasonal unemployment. Structural unemployment on the other hand is the result of the mismatch between the job market offerings and the skills of the potential employees. This is often caused by factors such as the skills and geographical location among other factors. When structural unemployment exists, frictional unemployment is likely to be effectively enhanced (Blanchard, 2005: pp304-307). Two main causes of unemployment are compared. These are the Cyclical (Keynesian) and Classical unemployment. Cyclical (Keynesian) unemployment is very much tied to the aggregate demand in the economy. It is even called the demand deficient unemployment. It is the kind of unemployment that emerges whenever there is insufficient aggregate demand in the economy caused by recession in the business cycle and as such there is no enough wages to manage equilibrium(Artis & Nixson, 2007: pp121-127). Classical unemployment is a result of job wages being higher than the market level mostly as a result of governmental and labour union interventions as pertains to minimum wages. Sometimes, the social taboos can also play a role in classical unemployment because they may prevent the wages from going down to the market level. How Voluntary Is Unemployment? Often a distinction is made between voluntary and involuntary unemployment. The former is a case of individual decision not to be in employment but the former is a result of impeding socio-economic factors such as governmental intervention, the market structure and the aggregate demand among other factors. To start with, it is necessary to note the fact that most of frictional unemployment is voluntary simply because it demonstrates an individual’s search patterns. All the other types of unemployment are however involuntary. Employment is a very productive element of the economy and as such it makes the employed to be economically efficient. The lack of it exposes them into economic inefficiency and struggle. Now, some individuals choose to be jobless under this category of frictional unemployment but the authorities as well participate in the voluntary nature of frictional unemployment. This unemployment is basically a result of deficiency of information on the job market which I may term as voluntary on the part of the authorities. It is reasoned that if the job seekers were to know certainly that they would be absorbed in a specific job then they would reduce the time wasted looking for new jobs thus abolishing unemployment frictional unemployment. Voluntary unemployment can also be illustrated in terms of supply. Most of the time normal labour markets reach equilibrium where the demand equals the supply and thus the price that results from this equilibrium may act or keep away sellers. Some sellers may want to sell at that price whereas others will choose not to. This is classical unemployment (when sellers choose not to sell at the equilibrium or market price). This is voluntary unemployment because individuals choose not to sell. However, if the equilibrium is broken and the demand becomes higher than the supply then the wages (price) is going to go higher than the market level and this will basically increase the level of employment. The opposite is also true. Thus choosing not to sell at the market price is deemed as a voluntary classical form of unemployment. Is there a way that this voluntary unemployment can be prevented? Through the use of fiscal policy and monetary policies, both are able to bring about a short term economic growth which will increase the demand for force which will in turn effectively increase employment wages. With increased employment wages, the rate of unemployment is reduced. As such the unemployment that ensues as a result of the government, through its central bank, failing to use both fiscal and monetary policies to reduce unemployment may be seen as voluntary unemployment (Leslie, 2005: pp134-139). Inasmuch as it was earlier mentioned that except frictional unemployment the other types of unemployment are involuntary, it is important to note that it is not easy to clearly categorise the types of unemployment into voluntary or otherwise without overlap. It was earlier said that structural unemployment is the result of the mismatch between the job market offerings and the skills of the potential employees. This is often caused by factors such as the skills and geographical location among other factors. When structural unemployment exists, frictional unemployment is likely to be effectively enhanced. This description implies the involuntary orientation of Structural unemployment but it may as well represent the past voluntary preferences secured by the unemployed and as such it is voluntary. Similarly, the fact that structural unemployment enhances frictional unemployment qualifies to have a voluntary component because frictional unemployment is primarily voluntary. Mismatch between the job market offerings and the skills of the potential employees is a clear indication that the potential employees fail to look for labour market information or the authorities (particularly the labour unions) fail to submit precise information on the requirements of the labour market such that the potential employees arm themselves with the necessary skill among other relevant requirements. Such failures, be it on the labour union’s side to disseminate information to job seekers or on the individual’s side to seek information on the labour market requirements, these failures result from voluntary choices much of the reason to why the orientation of structural unemployment is more to the voluntary territory than it is to the involuntary one. Classical unemployment is a result of job wages being higher than the market level mostly as a result of governmental and labour union interventions as pertains to minimum wages. Sometimes, the social taboos can also play a role in classical unemployment because they may prevent the wages from going down to the market level. This implies an involuntary nature of classical unemployment but it is imperative to note that classical unemployment can result from the voluntary legislative and economic choices made by not only the labour unions and/or political parties but also the legislative and economic choices made by the government through its central bank. Social taboos can thwart wages’ drop to market levels thus leading to classical unemployment. Subscription to these social taboos is not an involuntary but a voluntary venture and as such qualifies classical unemployment as voluntary. Cyclical (Keynesian) unemployment is very much tied to the aggregate demand in the economy. It is even called the demand deficient unemployment. It is the kind of unemployment that emerges whenever there is insufficient aggregate demand in the economy caused by recession in the business cycle and as such there is no enough wages to manage equilibrium between demand and supply in the labour market. Recession plays a key role in this kind of unemployment and as such the Central Bank has the responsibility of slowing down recession (by taking decisive measures) thereby averting cyclical unemployment. One of the measures that the central bank can take to slow down recession is to encourage spending by effectively reducing banks’ savings interest rates. When the interest rates on the savings are feasibly low, people are more likely to invest the money elsewhere where they will earn more interest and as such spending could have been encouraged hence slowing down recession (Lewis & Artis, 1991: pp78-104). There are other choices that a central bank can make to slow down recession and all these depend on a number of factors. What is important though is the fact that whatever measure taken, it should be able to slow down recession hence averting cyclical; unemployment. Choice on what measure the central bank takes is a purely voluntary venture thus affording cyclical unemployment some aspects of voluntary unemployment. If such measures are not taken, prices of products go down causing the wages to dip as well. Once this happens those with money anticipate more lowering of prices and as such there is heavy saving. Heavy saving continues, prices dive deeper and deeper and wages follow suit and the end result is cyclical unemployment. This is the reason why the Central Bank should ensure that every possible voluntary course of action to slow down if not stop recession. As mentioned earlier, seasonal unemployment is caused by the fluctuations in workforce demands in the labour market. Some industries experience patterns of workforce demand which vibrates between high and low demand for workforce depending on the production dynamics. As such, when the industries are at their peak, the rate of unemployment is low (high employment rates). The opposite of this is also true. Thus, the kind of unemployment that results when the industries are at their off peak (as far as demand for workforce is concerned) is called seasonal unemployment (Leslie, 2005: pp134-139). The question that remains is, if there is a way that such seasonal unemployment can be averted? Well, this is possible if the industries decided to diversify their production line and their activities as well. Diversification enables an industry to remain profitable even during the period which could otherwise be termed as off-peak. Basically, there is something that can be done to do away with such concepts as off- peak and peak periods or if at all these will occur, then their effects would not be as far reaching such that seasonal unemployment results. These possible courses of actions (such as diversification, market research, promotions etc) because industries have come to believe that nothing can be done with off-peaks and as such seasonal unemployment has to rage on every off-peak following this rather voluntary ignorance of the industries. As such, one can effectively say that seasonal unemployment just like all he other types of unemployment has an aspect of voluntary unemployment. Conclusion It was mentioned earlier that it is very difficult to categorize types of unemployment as voluntary or otherwise without overlap. This has turned out to be true based on the fact that we have found at least a voluntary aspect in each of the types of unemployment albeit most of the types are more involuntary than they are voluntary. The bottom line remains that most odd the unemployment in the labour market is primarily voluntary and there is always something that can be done to avert these types of unemployment. There is every reason why unemployment has to be averted because albeit it can have some economical benefits its economic implications have far reaching negative impacts on both individuals and societies. It is good news that the voluntary aspect is present, though minimal, in most types of unemployment and as such it is possible to do something to avert unemployment in general. References Artis M J & Nixson F, (2007): The Economics of The European Union: Policy and Analysis, Oxford University Press, pp121-127 Lewis M & Artis M J, (1991): Money in Britain: Monetary Policy, Innovation and Europe, Philip Allan Publishers, pp78-104 Blanchard O, (2005): Macroeconomics, Pearson Prentice Hall, pp304-307 Hillier B, (1991): The Macroeconomic Debate: Models of the Closed and Open Economy, Wiley-Blackwell, pp157-159 Leslie D, (2005): Advanced Macroeconomics: Beyond ISLM, McGraw-Hill, pp134-139 Read More