Causes of Unemployment

Introduction

Unemployment represents the total number of able men and women of working age seeking paid work. It is a “tragedy to the individual” (Beveridge, 1931, p.10) and is usually calculated by using the unemployment rate which is described as the majority of those in the work force who are without paid work. The unemployment rate in the UK was 7.8 percent for the three months to June 2009 and the number of unemployed people rose by 220,000 over the quarter and by 750,000 over the year, to hit 2.43 million, according to the National Office for Statistics (NOS, 2009).

A number of factors are responsible for the presence of unemployment. The question in concern is “what are the remedies for the various economic malfunctions leading to unemployment?”. This essay will explore the causes of unemployment and then it will suggest suitable remedies in order to cure this “symptom” (Beveridge, 1931).

Causes of Unemployment

Keynes (1936) claimed that insufficient effective demand for products and services in the economy is the primary cause of unemployment. Others such as Jackman and Roper (1987) argued that structural problems such as inflation inherent in labour markets (structural unemployment) create output losses and hence result in unemployment. In fact, Harold Wilson, the former British Prime Minister, argued that “Inflation is the mother and the father of unemployment” (Dawson, 1992, p. 57). Nevertheless, neoclassical economics tend to discard these explanations. In deed, they focus more on the excess demand for goods and the excess supply for labour which result in minimum wage and job security policies, higher taxes and other policies imposed on the labour and may dishearten the hiring of workers (classical unemployment) (Argy, 1994).

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The prospect that high labour taxes may cause unemployment appears to be reasonable in the current climate. Evidence suggests that unemployment in the EU rose around 4 percentage points from 1965 to 1995 while the investment share of outputs decreased about 3 percentage points – with a gradual decrease in growth of 4 percentage points a year according to research (Daveri, Tabellini, Bentolila and Huizinga 2000). Others such as Lucas argued differently that people are not in employment because they voluntarily choose to do so (frictional unemployment) (Hayes, 2006) and not because of the taxes imposed to them.

Some of the most famous economists in the world demonstrated that misguided policies are one of the most important causes of high unemployment (Modigliani et al., 1998). Mistakes in demand management, incorrect supply policies and other policies such as minimum wage and job security legislation, work division and early retirement have a significant role in accounting for unemployment (ibid).

In a non command economy, a significant cause of unemployment is that the rule of supply and demand is not properly applied to the amount of money to be paid for the employees. This can be seen during the periods of decreasing demand for products and services; that the earnings of all people in employment are not immediately reduced by the real percentage in order for firms to become sustainable. Existing legal frameworks, labour unions and governments are to blame for such unemployment phenomenon.

Another cause of unemployment which is no less important than the aforementioned is rapid changes in the labour force – described as people who are of working age and not currently in full-time education. Their number is predicted to rise with the demographic structure of the population. A baby-boom (a considerable increase in the birth rate) could bring these people of working age between 16 and 21 years later to enroll in the labour-force. If there is an equal number of people who retiring from the labour-force at the other end, unemployment will remain the same. Nevertheless, following a baby-boom there are often more people joining than leaving the work-force.

Deferent aspects may be right in different ways; contributing to our understanding of various causes of unemployment.

Suitable remedies

Focus has been made on three regulations to combat unemployment (ibid). The first regulation is to increase public sector investment. Private sector investment would then be increased in order to stimulate employment. The second regulation refers to urging the central bank to decrease the rate of interest and thus attracting private sector investment to increase the demand for labour. The third policy works its way to increase work motives (to firms and workers) as a mean to improve employment.

With regard to the second proposal, it should be recognized that if firms are currently operating with considerable excess capacity, increasing employment by the way of private sector investment may not be the greatest short-run strategy. Suppose that most of the firms are operating with overcapacity, and that encourage of a new investment will require larger profits in the short-term, the best strategy is the one that increase deficit spending and thus real profits. The proposal to improve public sector investment seems to be (through its effect on short-run profits) a motive for further hiring in the short-term. Thus, more workers will be hired by firms as their short-run profits anticipations increase. Nevertheless, lowering interest rates will not encourage them to commit a new investment – at least until some optimism has been created. The last will take place only after short-run profits cause an upward change of long-run profit anticipations resulting in the time lag problem and policy becomes ineffective.

Another efficient way for government to resolve the high level of unemployment would be to either increase the number of jobs for individuals or offer early retirement to older individuals who are close to retirement. With regard to the first option, creating new jobs seems to be a reliable remedy. In fact, a program of straight job creation in the form of public jobs would achieve actual full employment (i.e. zero involuntary unemployment). However, government needs time to create new jobs and this might take many years. Considering the second remedy, there is an extra cost involved in paying the retirement expenditures. However, it may be counterbalance by the savings from not having to pay benefits for unemployed people and the additional tax revenues hired workers will pay; resulting in the greater multiple effects their money would have on the total economy.

Conclusion

As demonstrated, there are a number of causes responsible for the unemployment problem. Confronting unemployment requires diagnosis of the causes and then eradicating or decreasing these causes. In order to understand the problem in different perspectives, it requires the understanding of how a free market economy behaves. This will offer knowledge that enables the governments to control the problem and develop proper solution. The proposal for new job creation is a good solution. However, such a program requires time so offering early retirement to older individuals who are close to retirement and replacing them with unemployed people is the most promising solution to the unemployment puzzle – at least in the Euro-zone.