Public Policy - the Soaring Rate of Unemployment in USA - Research Paper Example

Public Policy - the Soaring Rate of Unemployment in USA Table of Contents Public Policy - the Soaring Rate of Unemployment in USA 1 Introduction 3 The soaring rate of unemployment in USA 4 Need for government policies 6 Government polices undertaken to correct the soaring rate of unemployment 8 Any person deriving benefits out of the Act however, cannot continue to do so for an average of 26 weeks in a year (varying from state to state). Moreover, this benefit is taxable and has to be deducted from the person’s income, once he starts earning given his income is taxable. However, exceptions are made in situations when the problem of unemployment is found to be a widespread one, i.e., during periods of recession (United States Department of Labor, 2004, “State Unemployment Insurance Benefits”). 9 According to the terms of the program, any employer who hires people who had stayed unemployed since at least two months to be exact, the former is entitled to receive tax benefits from the government. To be precise, the employers would be exempted from the payment of Social Security employment taxes of an amount of 6.2% from the first US$ 106,800 to be paid as wages. Moreover, if the employer is found to be employing any such employee for a period of a whole year, they are also liable to get a net tax benefit of US$ 1000 for every such employee (Lee, 2010, “Putting Americans Back to Work: Another Step Forward”). 10 Benefits drawn by private sector houses 11 Conclusion 15 Policy Recommendations 15 References 17 Anderton, A. (2000). Economics (3rd Edition). Singapore: Dorling Kindersley. 17 Boone, L. E. & Kurtz, D. L. (2010). Contemporary Business 2010 Update. London: Wiley & Sons. 17 Edgell, S. (2006). The sociology of work: continuity and change in paid and unpaid work. London: Sage. 17 Gnos, C. & Rochon, L. (2006). Post-Keynesian principles of economic policy. London, UK: Edward Elgar Publishing. 17 Gottschalk, J. (2005). Monetary policy and the German unemployment problem in macroeconomic models. London: Springer. 17 Hilbert, C. (2008). Unemployment, Wages, and the Impact of Active Labour Market Policies in a Regional Perspective. Berlin: Logos Verlag. 17 H. R. 2847 “Hiring Incentives to Restore Employment Act” (March, 2010). Available at http://waysandmeans.house.gov/media/pdf/111/HR2847_HireAct.pdf (Accessed: November 16, 2010). 17 Organisation for Economic Cooperation and Development (2010). “Launch of the OECD Economic Survey of the United States”. Available at http://www.oecd.org/document/22/0,3343,en_21571361_44315115_46051606_1_1_1_1,00.html (Accessed: November 16, 2010). 17 Snower, D. J. & Dehesa, G. (1997). Unemployment policy: government options for the labour market. Australia: CUP. 18 United States Department of Labor (March, 2004). “State Unemployment Insurance Benefit”. Available at http://workforcesecurity.doleta.gov/unemploy/uifactsheet.asp (Accessed: November 16, 2010). 18 United States Department of Labor (January, 2010). “Labor Force Statistics from the Current Population Survey”, Bureau of Labor Statistics. Available at http://www.bls.gov/cps/prev_yrs.htm (Accessed: November 16, 2010). 18 Bibliography 18 Baumol, W. J. & Blinder, A. S. (2008). Economics: Principles and Policy. USA: Cengage Learning. 18 Brigham & Houston, (2009). Fundamentals of Financial Management. USA: Cengage Learning. 18 Friedman, B. M. (1985). Corporate capital structures in the United States. Chicago: University of Chicago Press. 18 Goodwin, N. R. & Nelson, A. J. (2009). Macroeconomics in context. London: M. E. Sharpe. 18 Gordon, I. (1987). Unemployment, the regions, and labour markets: reactions to recession. London: Taylor & Francis. 18 Knight, K. G. (1986). Unemployment: an economic analysis. New Jersey, USA: Rowman & Littlefield. 19 Layard, R. Nickell, S. & Jackman, R. (2005). Unemployment: macroeconomic performance and the labour market. Pxford: OUP. 19 Mankiw, N. G. (2008). Essentials of Economics. USA: Cengage Learning. 19 Petit, P. & Soete, L. (2001). Technology and the future of European employment. London: Edward Elgar. 19 Rosenbloom, J. S. (2005). The handbook of employee benefits: design, funding, and administration. New York: McGraw-Hill. 19 Smith, S. W. (2003). Labour Economics. London: Routledge. 19 Symes, V. (1995). Unemployment in Europe: problems and policies. London: Routledge. 19 Usher, D. (2005). Political economy. London: Wiley & Sons. 19 Wagner, H. (2000). Globalization and unemployment. London: Springer. 19 Wapler, R. (2003). Unemployment, market structure and growth. London: Springer. 19 Wessels, W. J. (2006). Economics. London: Barron’s. 19 Introduction Government policies are often designed to promote a regulated growth and development in a nation. During crises, or in situations where growth in a particular sector throws a negative impact on others, the national administration of a nation comes forward to bail the economy out of it. Usually, government policies are aimed at accomplishing balanced growth in an economy which is the reason why they are targeted at adjusting the most influential of all economic elements, such as the rate of tax, rate of employment, trade and tourism and towards infrastructural development. Each one of these factors has immense effect on almost every sector of an economy, especially the private institutions. The private sector units which solely run on profit motives are the ones affected the most out of these policies. Though they are framed for the well-being of a nation as a whole, often these very programs are found to be acting against the interests of the private business houses. The present paper is an attempt to envision the impact that the government policy of attaining a targeted rate of employment in the economy, had upon the private sector units of USA. This had been one of the many urgent projects that the national government had undertaken to dilute the impact of the financial meltdown that had its origin in the USA post the advent of the millennium. Rate of unemployment had soared up high as many an institution had declared a shut-down after they went bankrupt and decided to dissolve their assets. The acuteness of joblessness in the nation during that period was reflected through depreciation in the standard of living in the nation. To avoid a further deterioration, the national administration decided to adopt corrective measures not only to put an end to the problem but also to rectify the previous losses. However, this forcible measure had a mixed impact upon the private sector units of the nation. The present paper attempts to evaluate whether the program had really been a beneficial act for every segment of the nation or not. The soaring rate of unemployment in USA Post crisis, the rate of unemployment in USA had never been as low as it used to be prior to that. As the diagram underneath illustrates, the rate of unemployment rose sharply at the beginning of the third quarter of 2008, and continued its ascent till the second quarter of 2010. The maximum rate of unemployment that the nation saw post the advent of the new millennium was equal to 10.1% of the total labour force; it was attained during the fourth quarter of 2009. The average rate of unemployment that the nation had experienced in the decade 1990-2000 used to be 5.59%, in contrast to 5.71% between 2000 and 2009 (Gnos & Rochon, 2006, p. 164). Though there appears to be little difference in the readings, truth about the scenarios prevailing during the two phases would be evident from the fact that the standard deviation of the rate of unemployment during the previous phase had been 1.15, while that in the latter period was 1.453 (United States Department of Labor, 2010). Given a higher degree of dispersion in the figures of the latter phase, the comparative instability is obvious as well (Bureau of Labour Statistics, 2010; OECD, 2010). Henceforth, the rate of unemployment is found to have receded, which is anticipated to fall further by 2011. Need for government policies While the sharp rise had been an outcome of the financial crisis which multiplied due to the closely-knitted ties between various sectors of the economy, the eventual downfall had been the consequence of carefully undertaken government policy instruments. A rising rate of unemployment is one of the most pestering problems in any economy. The greater the rate of unemployment is, lower are the chances of the nation to be producing at its full employment level. If a nation produces insufficiently, i.e., at a point which is much lower than its potentials, there are chances of a fall in the national income yielded by the nation as well. This is reflected from the underlying diagram that enhances the fact that a rise in the rate of unemployment in USA is inversely related to the inflation adjusted growth rate of the nation (Trading Economics, 2010). It illustrates that the nation had experienced a sharp fall in the rate of growth in income at a similar time when there was a rise in the rate of unemployment. In fact, a further assessment shows that the fall in the growth in income is followed by a rise in the rate of unemployment in the nation indicating that a fall in the latter results to a rise in the former. This is obvious given that the level of income in a nation could be treated as a proxy of the rate of consumption demand prevailing in the same. Since the producers are likely to produce according to their anticipations formed through studying past consumption traits, a fall in the rate of income generation in a nation, at a particular point of time, will be corresponded by a rise in the rate of unemployment in the next. But the circle continues to exist as long as no external push is provided, i.e., a fall in the rate of income generation leads to a rise in the rate of unemployment that reduces consumption demand and hence resulting to further deterioration of the level of income. Moreover, a fall in income will lead to a fall in the standard of living of the nationals. Thus, a surging rate of unemployment will also result to a recessionary phase in a nation. Lower that a nation produces higher will be its level of imports. However, there will be no appreciation in the level of exports since the national production level has been truncated due to unavailability of ample labour force. Hence, the nation will face a falling trade balance that has serious implications over the economy’s power of income generation. The adjoining diagram is witness of the rising trade deficit of USA. Though it had forever been numbered at negative positions, due to the nation’s immense dependence upon others for to meet the population demands, the statistic had been in at a less bad state even before the crisis struck. The advent of the millennium saw the figures plummeting down vigorously, and eventually, reaches a bottom between 2006 and 2009 (United States Census Bureau, 2010). This fall undoubtedly created a negative impact upon the aggregate level of production in the nation as the producers got a hunch about a falling demand among consumers for domestic goods. Hence, there were retrenchments leading to a rise in the rate of unemployment in the nation. However, similar to the situation of a falling level of income, depreciation in the domestic trade balance demotivated the producers from producing much. Amidst such a situation, it is necessary for the national government to provide some external push in the form of resource injection. This resource however, must be poured into the nation through a channel that helps to induce growth in as many sectors as possible, so as to result in a trickle-down effect. Fortunately enough, any policy undertaken to benefit the labour class directly is bound to have a trickle-down effect, since a better rate of unemployment will be reflected through a better level of production and income, causing an appreciated consumption demand. Hence, the nation will continue in a path of growth hitherto ending the recessionary phase (Gottschalk, 2005, p. 33). Here lies the importance of government policies. Government programs aimed at correcting the rate of unemployment in a nation try to make adjustments between the demand and supply of labour in the labour market. In case there is excess supply, resulting in an increased rate of unemployment in an economy, the national government attempts to instigate the producers towards producing more and thus, inducing them to employ more labour. Some essential measures that the national administration is often found to be undertaking are those of training the existing labour force regarding some skills or in mobilising them in various sectors following the trends of consumer demands. Many a times, the national government is also found to be producing new job opportunities within the nation to incorporate more and more people of workable age and hence, reducing the rate of unemployment through the process (Hilbert, 2008, p. 16; Anderton, 2000, p. 248; Boone & Kurtz, 2010, p. 93). Government polices undertaken to correct the soaring rate of unemployment The national administration of USA had undertaken various policies to deal with the soaring rate of unemployment in the nation from time to time. Some of them have been discussed underneath. Unemployment Compensation Extension Act of 2010 One of the main unemployment policies which the national government had often laid an emphasis to is that of unemployment insurance. According to the terms of such a program, residents of the USA who have lost their jobs without any fault of theirs are entitled to receive a certain amount of compensation from the national government. This amount however, depends upon the amount that the worker earned in the past and is calculated so as to enable him to pay for his subsistence needs (Snower & Dehesa, 1997, p. 546). Such a policy is again empowered by taxing the employers with the help of the bill named Federal Unemployment Tax Act (FUTA) that charges compensation for the employees out of the income of the employers. Such a policy is believed to be helping to boost economic growth in the nation through a rise in the level of consumption demand or least retaining it at the same levels. In a situation where a considerable part of the population, supposed to support their families, are found to be devoid of work or out of job, the national government reimburses them with money accumulated over years as unemployment insurance. With the help of this money, the national youth can sustain their families and thus on an aggregate, maintain the national consumption demands at a moderate level. Hence, advancing unemployment benefits could be compared to an act of social welfare where the society is benefited on the whole through a better allocation of resources throughout the economy. Though the act was decided upon during the phase of Great Depression occurring during 1930s, it was brought into effect post the recent financial recession through the Unemployment Compensation Extension Act of 2010 (Edgell, 2006, p. 103). According to the provisions made under the particular bill, Unemployed youths who are eligible for the unemployment benefit, get temporary financial assistance from their respective state governments, to be approved by the central government, only for a time period till when they stay unemployed. These unemployment insurance policies are being implemented by the respective State governments of USA, following the guidelines framed by the Federal law. In a similar fashion, the people who must receive unemployment insurance benefits are also being decided by the State governments of the nation. In most of the cases, the funds being used to compensate the unemployed youths are extracted out of taxing the employers in different states. Any person deriving benefits out of the Act however, cannot continue to do so for an average of 26 weeks in a year (varying from state to state). Moreover, this benefit is taxable and has to be deducted from the person’s income, once he starts earning given his income is taxable. However, exceptions are made in situations when the problem of unemployment is found to be a widespread one, i.e., during periods of recession (United States Department of Labor, 2004, “State Unemployment Insurance Benefits”). Hiring Incentives to Restore Employment (HIRE) Act of 2010 A second important measure that the national government of USA undertook as part of fiscal policy instruments to curb the rising rate of unemployment in the nation was the Hiring Incentives to Restore Unemployment (HIRE) Act of 2010. This one is not derived from any that had already existed in the past; rather was newly signed by the national government to restore jobs among the national youths. It was especially designed keeping in mind the brunt of the recent financial recession and the impact that the same had upon various sectors of the nation. Another important aspect that was taken care of was that of different avenues which could lead to a looming problem of unemployment in the nation. Measures were undertaken so as to insure that employment opportunities of the people were not hurt even if any crisis befalls any of these channels. Following are the details of the program being exercised in the nation – According to the terms of the program, any employer who hires people who had stayed unemployed since at least two months to be exact, the former is entitled to receive tax benefits from the government. To be precise, the employers would be exempted from the payment of Social Security employment taxes of an amount of 6.2% from the first US$ 106,800 to be paid as wages. Moreover, if the employer is found to be employing any such employee for a period of a whole year, they are also liable to get a net tax benefit of US$ 1000 for every such employee (Lee, 2010, “Putting Americans Back to Work: Another Step Forward”). Small business houses, which are found to be employing such people who had remained unemployed since 2 months, are provided a choice to write off their expenses incurred in purchasing equipments and choose to repay them over time according to the rates of depreciation. Such a step is believed to motivate the investors towards making future investments. However, there is a limit till which the investors or rather the employers may write off, though it revised from time to time. According to the latest revisions being made, small businessmen can write off only up to US$ 125,000 of total expenditure being incurred in terms of capital costs (“Hiring Incentives to Restore Employment Act”, 2010, p. 2). The national government also encourages the prospects of future growth through making investments in long term projects such as betterment of health and education. Moreover, the national administration also seeks to promote energy projects to assure a balanced growth in the technical arena as well. In addition, the government takes care of infrastructural developments such as the provision of suitable logistics and transport services so as to benefit investors out of the scheme. The incorporation of this benefit has been facilitated by means of issuing bonds in the name of the government. These bonds especially meant for sale to the investors are targeted at making possible economic development. Since investors are the ones who purchase such bonds, they are entitled to tax exemptions by a proportion of the total amount of credit that they contribute to the government (Lee, 2010, “Putting Americans Back to Work: Another Step Forward”). The aforementioned policies are the two most popular among all fiscal programs brought under implementation by the national administration of the USA to help alleviate the problem of unemployment in the nation. Given the speeding intensity of the problem in the nation, the implementation of either one is necessary to ensure that the problem of unemployment is solved. However, given that the USA is an economy run mostly by private business houses rather than public sector entities, it is equally important to pacify the interests of the former. Hence, the national government must also make a point of keeping undisturbed, if not easing, the interests of the private sector units. The following section will deal with ways through which the private business houses can gain out of the government policies being designed to abolish the problem of unemployment from the nation. Benefits drawn by private sector houses The aforementioned section primarily dealt with the benefits that the national government provides to its nationals during a phase of widespread unemployment in the nation. However, it is also important to assess the exact benefits that these policies had upon the private business houses of the nation, especially given the fact that the economy is primarily based upon production made by private business houses. In fact, the national government was tactical enough to frame their policies in a way so as to benefit the parties, viz., employees and employers. Nevertheless, such a boost is essential given that the nation is passing through an extremely tight period when every sector in the nation needs an external push-up to revive itself. One very important aspect that the national administration had taken care of while addressing the problem of unemployment in the nation is that of tax exemption. In fact, according to the theories of classical economics, it is important to instigate the employers by some way or other to make them produce more and hence induce consumption demand. According to the terms stated by the ‘Hiring Incentives to Restore Employment (HIRE) Act of 2010’, any person who employs a person who has stayed unemployed since 2 months at least, is entitled to get a tax benefit. Furthermore, for every such people employed for a year, the respective employer can claim an income tax credit worth US$ 1,000 per head. These tax benefits help to stimulate growth in the nation by motivating these employers to exceed their labour force through employing people who had remained unemployed since a long time. According to the adjoining diagram that illustrates the situation through a demand-supply analysis, a tax exemption is equivalent to a fall in per unit price of a good produced. Such a development results to a downward shift of the supply curve so that as to accommodate the same quantities of the goods supplied at a lower per unit price. At such a position, with the demand curve remaining fixed at its initial position, the equilibrium point, F is decided to the right of the previous equilibrium, E. At F, the equilibrium price is lower, though the equilibrium quantity is higher. Hence, such a step cannot only reduce unemployment directly, but also can induce production indirectly thus correcting recession in the economy. Thus, not only can the problem of unemployment be solved, that of inspiring the employers could also be attended via the program. Secondly, the employers are also given a choice about reducing their liabilities of bearing capital expenditures in case that they employ people who had stayed unemployed since some period. Given that these benefits are especially meant for small business houses, the higher that the number of such people being employed by the investors, lower will their liability be. Such a measure motivates these businessmen towards investing more and more and hence ensures future growth in the nation. The impact of such a benefit could be represented in a way similar to that of a tax exemption when the supply curve is found to be moving in a rightward direction resulting to a fall in the equilibrium price as well as a hike in the equilibrium quantity being produced. Lastly, according to the terms of HIRE Act of 2010, the government uses the tax money being drawn out of the incomes of the businessmen in rebuilding the infrastructure in the nation so as to facilitate further investments in the arena. With the national administration helps to ease out the problems of transportation in the nation, the small business houses are found to benefit a lot out of it. Transportation is an essential element in ensuring good communication between the factory and the market, as well as between two factories. Hence, better the roads and transport system in a nation is, better are the chances of investment in the same. Moreover, good transport system though might not appear to be as important an element, is always a factor that foreign investors consider while deciding about venturing in a particular region. Hence, if the national government helps to boost up the transportation system in a nation at a time when it is passing through a recessionary phase, chances of attracting FDI becomes high as well. Added with the fact that availability of labour would be cheap enough (due to a prolonged phase of unemployment), the foreigners often find such a scenario to be a profitable one. This situation thus, could also be compared with the same demand supply schedule, which ensures a significant economic growth in future. Conclusion The paper mainly attempted to figure out how far the unemployment benefits being adopted by the national administration of USA had been successful in addressing the economic problem as well as attending to the interests of the private sector houses of the nation. While the main objective of the policies being framed had been to curb the vice of unemployment that had surged post the financial crisis, interests of the private houses could not be given a side-berth as well since they are the ones responsible for supporting the nation. Hence, the national government framed policies aimed at addressing these twin purposes; such policies included benefits such as tax exemption and writing-off capital expenses for employers who have recruited unemployed people under them. Moreover, the national government also figured out ways of addressing the infrastructural issues pestering the nation out of the taxes being yielded from the employers. Such a step helped to boost up possibilities of future economic growth as well. Policy Recommendations The problem of unemployment is considered as one of the most pestering of all problems in an economy. A problem as dire as this is often attended by the government through the implementation of fiscal policies aimed at correcting unemployment. However, in a nation characterised by the prevalence of private sector units, the national administration must also make a note of the interests of the former. The national government of the United States had adopted wise strategies which catered to the needs of the economy in such a scenario. The recent financial crisis which affected the economy was tackled by the domestic government through the implementation of programs which helped to correct the problem as well as addressed the interests of the private sector units. However, there still prevailed some that might not have served the concerns of the private businessmen. For instance, the businessmen might consider themselves worse-off in cases that they are instigated to employ workers who had stayed unemployed since a long time. Though they figure out the tax benefits to be a relative advantage and make use of it, the truth is that they might find themselves at a loss in the long run due to their involvement with untrained and unskilled workers. Hence, it would have been a better option had the national government also arranged for some skill-building or training of the unemployed workers, during the phase they are out of a job. According to the theory popularised by the concept of Philips Curve, unemployment is directly related to inflation. Hence, apart from rectifying the economic hassles from the heart of the nation through framing government policies directly attending the economic problem and indirectly attending to the interests of the private sector units, it is equally important to make a note of the problem of inflation. Though recession can stunt the prospects of a nation by a large extent, too much recession can also result to devaluation. Hence, the national government must learn to strike a balance between the two, even while attending to the basic problem. References Anderton, A. (2000). Economics (3rd Edition). Singapore: Dorling Kindersley. Boone, L. E. & Kurtz, D. L. (2010). Contemporary Business 2010 Update. London: Wiley & Sons. Edgell, S. (2006). The sociology of work: continuity and change in paid and unpaid work. London: Sage. Gnos, C. & Rochon, L. (2006). Post-Keynesian principles of economic policy. London, UK: Edward Elgar Publishing. Gottschalk, J. (2005). Monetary policy and the German unemployment problem in macroeconomic models. London: Springer. Hilbert, C. (2008). Unemployment, Wages, and the Impact of Active Labour Market Policies in a Regional Perspective. Berlin: Logos Verlag. H. R. 2847 “Hiring Incentives to Restore Employment Act” (March, 2010). Available at http://waysandmeans.house.gov/media/pdf/111/HR2847_HireAct.pdf (Accessed: November 16, 2010). Lee, J. (2010). “Putting Americans Back to Work: Another Step Forward”, The White House. Available at http://www.whitehouse.gov/blog/2010/03/18/putting-americans-back-work (Accessed: November 16, 2010). Organisation for Economic Cooperation and Development (2010). “Launch of the OECD Economic Survey of the United States”. Available at http://www.oecd.org/document/22/0,3343,en_21571361_44315115_46051606_1_1_1_1,00.html (Accessed: November 16, 2010). Snower, D. J. & Dehesa, G. (1997). Unemployment policy: government options for the labour market. Australia: CUP. Trading Economics (2010). “United States Unemployment Rate”. Available at http://www.tradingeconomics.com/Economics/Unemployment-Rate.aspx?Symbol=USD (Accessed: November 16, 2010). United States Census Bureau (2010). “U.S. Trade in Goods and Services - Balance of Payments (BOP) Basis”. Available at http://www.census.gov/foreign-trade/statistics/historical/gands.txt (Accessed: November 16, 2010). United States Department of Labor (March, 2004). “State Unemployment Insurance Benefit”. Available at http://workforcesecurity.doleta.gov/unemploy/uifactsheet.asp (Accessed: November 16, 2010). United States Department of Labor (January, 2010). “Labor Force Statistics from the Current Population Survey”, Bureau of Labor Statistics. Available at http://www.bls.gov/cps/prev_yrs.htm (Accessed: November 16, 2010). Bibliography Baumol, W. J. & Blinder, A. S. (2008). Economics: Principles and Policy. USA: Cengage Learning. Brigham & Houston, (2009). Fundamentals of Financial Management. USA: Cengage Learning. Friedman, B. M. (1985). Corporate capital structures in the United States. Chicago: University of Chicago Press. Goodwin, N. R. & Nelson, A. J. (2009). Macroeconomics in context. London: M. E. Sharpe. Gordon, I. (1987). Unemployment, the regions, and labour markets: reactions to recession. London: Taylor & Francis. Knight, K. G. (1986). Unemployment: an economic analysis. New Jersey, USA: Rowman & Littlefield. Layard, R. Nickell, S. & Jackman, R. (2005). Unemployment: macroeconomic performance and the labour market. Pxford: OUP. Mankiw, N. G. (2008). Essentials of Economics. USA: Cengage Learning. Petit, P. & Soete, L. (2001). Technology and the future of European employment. London: Edward Elgar. Rosenbloom, J. S. (2005). The handbook of employee benefits: design, funding, and administration. New York: McGraw-Hill. Smith, S. W. (2003). Labour Economics. London: Routledge. Symes, V. (1995). Unemployment in Europe: problems and policies. London: Routledge. Usher, D. (2005). Political economy. London: Wiley & Sons. Wagner, H. (2000). Globalization and unemployment. London: Springer. Wapler, R. (2003). Unemployment, market structure and growth. London: Springer. Wessels, W. J. (2006). Economics. 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