Causes and Impacts of Unemployment in Developing and Developed Economies - Literature review Example

Causes and Impact of Unemployment in an Economy By students’ Names Institution Course Prof Date Unemployment has and continues to be a major economic menace both in developing and industrialized countries. Although this economic menace is more pronounced in developing countries, Solow (2011) argues that unemployment is an increasingly challenging phenomenon in developed economies. Statistics indicate that unemployment in US and most countries in Europe have gradually increased since the onset of the economic recession in the year 2007. In developing countries, unemployment has been a major economic problem for many decades and continues to increase year after another. This paper will discuss the causes and the impacts of unemployment in developing and developed economies. In order to understand the causes of unemployment, it will be appropriate to discuss the major categories of unemployment. Economists agree that the major categories of unemployment are frictional, structural and cyclical unemployment. Frictional unemployment occurs when people graduate from schools and are in search of a job. This is an inevitable situation that happens in developing and developed countries. Structural employment occurs when a change in the industrial, climatic or demographic factors occur rendering some people jobless. The cyclical unemployment occurs due to economic recession and inflation in an economy (Sid 2012). The structural and cyclical unemployment are major aspects of economy and will be the focus of this paper. Figure 1: The major categories of unemployment in an economy (Sid 2012). According to Turnham and Eröcal (2014), the main cause of unemployment in an economy is inflation rate. Economists have studied the correlation between the inflation and unemployment for many decades and their conclusions have invariably differed. In 1958, Philips argued that reduction in unemployment empowered employees to push for increased salaries. This push for increased payment resulted to increased prices of the commodities as the employers passed the cost of the labor to the consumers. The increased cost of the commodities led to inflammatory buildup in the economy or the increased inflation rate. This theory by Philips was later challenged by economists in the 1970s decade. Today, the relationship between inflation and unemployment has been comprehensively studied and made apparent. Economists argue that inflation causes unemployment in two different manners. The first argument is that high and volatile inflation does not encourage investment. Inflation leads to high prices of the general commodities and hence high cost of living. Consequently, the large amount of earning made by people is used to meet the high cost of living and the percentage of the money left for savings is drastically reduced. Low saving translates to low investment and hence low job opportunities leading to high rate of unemployment. Gregoriou & Kräussl (2007) write that inflation discourages firms from saving and investing. Inflation creates uncertainty in the economy which discourages investors from investing in the economy. Foreign investors do not invest in the countries with high inflation rate as they fear losing their capital. Instead, they look for countries with low inflation rate. Foreign investors contribute to a considerable large number of jobs which help the local governments to handle the unemployment. Therefore, high rate of inflation discourages foreign from investing in an economy which leads to high unemployment. The low investment as a result of high inflation is a major cause of employment in developing countries. The second argument that relates inflation as a cause of unemployment is that advanced inflation leads to economic recession. Economic recession is, in real sense, a form of an inflation that affects a major region and has considerable economic impacts on the economy of that region. The main impact of the economic recession is that it reduces the aggregates demand of the products in the region. The reduced demand of the products leads to low production of goods and slow growth of economy. Slow economic growth translates to limited job opportunities as the economy does not provide the large number of opportunities required to meet the increasing growth of labor force. According to Kaitz (2014), economic recession is the major cause of the unemployment in developed countries such as the US and the UK. In 2007, the past global economic recession started to take its shape in the USA, affecting major investment in the region. Statistics indicate that the rate of unemployment in the USA has increased gradually since the year 2008, due to the economic recession. The recession later spread to Europe and other parts of the global. In the UK, the rate of unemployment became major economic problem when the recession hit the region. Apparently, while the low investment due to the inflation is the major cause of the unemployment in the developing countries, economic recession due to high inflation is the major cause of the unemployment in the developed countries. Figure 2: The rising rate of unemployment in the US over the past economic recession period (Kaitz 2014). Demographical and industrial changes are major cause of unemployment in both developed and developing countries. Advanced technology which has swept across all aspects of human life has seen millions of people in industries and other sectors of the economy lose their jobs. According to a survey conducted in the year 2014, technology has become a major cause of unemployment in most parts of the world in the 21st century (Kaitz 2014). Industries, government bodies and private sectors are increasingly becoming cognizant of the benefits that come with the new technology. The technology is more efficient and cost effective compared to human labor. As a result, most of the bodies have embraced the technology for economic purpose. The trend has seen machines replace the human labor resulting to large amount of unemployment. Structural unemployment is a problem in developing and developed countries. Corak and Heisz (2010), give an example of how the newspaper producers, editors and reporter have lost their jobs in the US as the web-based advertisements continue to replace the traditional advertisement. In the developing counties, structural unemployment is generating a lot of debate in the public domain as people in the agricultural and industrial sectors continue to lose their jobs due to the technology. The laid off labor increases structural unemployment in the countries. Gregoriou and Kräussl (2007) argue that government’s policies on the economic development and growth are major factors in the unemployment debate. Government programs play a vital role in stimulating economic growth and investment. Effective government’s spending strengthens and stabilize economic growth. Fiscal policies allow governments to regulate money calculation in an economy and hence regulating economic growth. In addition to the fiscal policies, governments spending on development programs such as construction of roads and other infrastructure have a direct influence on the rate of unemployment. These programs provide employment to a large number of the people hence reducing the unemployment. Governments around the world that have effective economic policies record a positive stride toward fighting the economic challenge of unemployment. Poor governments’ policies are arguably major causes of employment in the developing countries. Valletta (2011), indicate that poor government policies have played a major role toward the rapid increase in unemployment in the developing countries compared to the developed countries. The political instability, poor political institutions and high rate of corruptions are major characteristics of developing countries which contribute to misplaced priorities and loss of funds which could be used to stimulate economic growth and bring new jobs in the countries. As a result, a large number of the people graduate from learning institutions but the economies are not growing fast enough to provide enough opportunities for the graduating students. The impacts of the unemployment are well established in the societies around the world. The impacts range from social, psychological to economic impacts. This paper however, focuses on the economic impacts of unemployment on an economy. First, unemployment results to loss of income for both the government and the individuals. Governments around the world rely heavily on taxes paid by the employed people. Unemployment reduces the amount of taxes collected by the governments. In addition, most of the unemployed people experience a decline in their standard of living. The lack of earnings to meet their daily expenses result to debt problems and some of the people are not able to repay their loans and mortgage (Valletta 2014). The second impact of the unemployment is loss of national output. Unemployment is a clear indication that the total labor resources in the country are not exploited and is going to waste. Some people become desperate after searching for opportunities which are not there. They decide to leave the labor market permanently and this becomes a major negative impact in the long ran performance of an economy. Klaveren and Tijdens (2012) write that countries with high rates of unemployment record a decline in the GDP every year. As a result, these countries debts increase as they borrow to meet their financial requirements. In the USA, the national debt has increased rapidly since 2007 and this correspond to a rising rate of unemployment since this year. The same situation is replicated in most parts of Europe where the unemployment has increased since the onset of the global economic recession. Lastly, unemployment has some negative multipliers effects. Unemployment reduces people income and hence their buying power. The demand for various commodities in the market reduces forcing some firms and industries to close down as they cannot get enough market. The closure of the firms and industries further contribute to the loss of job hence raising unemployment level. The economic growth of the country is also affected due the close of the firms that provide some commodities in the market. The government is also forced to spend more money to meet the basic requirements such as medical and education facilities. The final outcome is that the economic growth continues to become more critical. This paper has discussed the causes and the impacts of unemployment in an economy. Unemployment has and continues to be a major economic menace affecting countries around the world. Although the rate of unemployment is considerable high in the developing countries, unemployment remains a major economic challenge in the developed countries. The major cause of unemployment both in developed and developing countries is inflation and economic recession. These phenomena discourage investment leading to low creation of employment opportunities. Structural changes in demographic and industrial sectors have also played a major role in the increasing rate of unemployment. Technological advancement has seen large number of people lose their jobs. Governments’ policies on economic growth also affect job creations and hence can cause unemployment. 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