A TREATISE ON ANY MACROECONOMIC PROBLEM TOPIC CHOSEN: UNEMPLOYMENT

CONCENTRATED AREAS:

DEFINITION

HISTORICAL NUMBERS WHY THE STUDY GRAPHICAL ILLUSTRATIONS MEASURES TYPES POLICIES

UNEMPLOYMENT
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Unemployment is referred to the general condition in which resources are willing and able to produce goods and services but are not engaged in productive activities. It is also a situation where in which persons are willing and able to work but at the prevailing wage structure (level) are not employed. While unemployment is most commonly thought of in terms of labour, any of the other factors of production (capital, land and entrepreneurship) can be unemployed. The analysis of unemployment especially labour unemployment goes hand in hand with the study of macroeconomics that emerged from the Great Depression of the 1930s. the most common measure of unemployment is the unemployment rate of labour. Unemployment arises when scarce resources that could be used to produce goods and services, resources that are willing and able to engage in production are not producing output. While the economy always has some degree of unemployment, it tends to be most severe and most problematic during a business-cycle contraction. HISTORICAL NUMBERS The unemployment of labour measured by the unemployment rate varies over time especially over the course of business-cycle activity rising during contractions and falling during expansions. The range is usually between 4% and 6% but it has been as low
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as 2% and as high as 25%. During the contraction of the early 1990s, the unemployment rate rose from 5% to 7%. In ensuring expansion that occupied the better part of the 1990s, the unemployment rate fell from the 7% level to just over 4%. During the contraction of the early 2000s, it rose from 4% to over 6%. While unemployment rate reaches relatively low levels during expansions, it never falls to 0%. In principle, full employment is thought of as occurring when all resources (especially labour) are engaged in production. In practice, full unemployment rate of about 5%. This 5% unemployment rate often termed natural unemployment rate include s both frictional and structural unemployment. WHY STUDY? Unemployment especially labour is a key macroeconomic issue that has concerned economists since at least the Great Depression. The devastating economic conditions of the 1930s, which at its depth was one out of four workers unemployed brought to the forefront the problems of unemployment. Two in particular that stand out are personal hardships and lost production.

Unemployment creates personal hardships for the owners of the unemployed resources. When resources do not produce goods, their owners do not earn income. The loss of income results in loss of consumption and lower living standards. While
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this problem applies to any of the resources, it is most important for labour. The owners of capital, land, and entrepreneurship often earn income from more than one resource. Many workers however, often earn income from only labour

It causes total production in the economy to decline. If fewer resources are engaged in production, fewer goods and services are produced. An initial decline in income, consumption and production associated with unemployment triggers further declines in income, consumption and production. As such members of the society escaping the direct, immediate personal hardships of unemployment succumb to the indirect multiplicative problems of lost production. GRAPHICAL ILLUSTRATION

Unemployment can be illustrated with two common economic models; production possibilities and the aggregate market (AS=AD analysis). Production possibilities:

Unemployment is illustrated with production possibilities analysis as any production combination that places the economy inside the Production Possibilities Frontier. Aggregate Market:

In the aggregate market, unemployment is illustrated with a recessionary gap in which that short-run equilibriumthe intersection of the short run aggregate supply curve (SRAS) and the aggregate demand curve (AD) lies to the left of the long-run aggregate supply curve (LRAS)

MEASURES OF UNEMPLOYMENT The three (3) common unemployment measures are:

unemployment rate, capacity utilization rate, and vacancy or occupancy rate.

Unemployment Rate:

The most noted and widely used measure of unemployment is the unemployment rate of labour. It is the percent of the labour force that is officially unemployment. This is the rate reported monthly
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by the Bureau of Labour Statistics and it is clearly the popular choice when it comes to measuring business-cycle instability.

Capacity Utilization Rate:

This is actually a measure of capital employment but it provides a great insight into the unemployment of capital. Specifically, the capacity utilization rate is the ratio of actual production undertaken by factories to potential production. If the capacity utilization rate is up then the unemployment of capital is down.

Vacancy Rate:

This vacancy rate measures the percent of available buildings (office building, apartments, etc) that are vacant and have unemployed capital (rooms). A complementary measure is the occupancy rate which measures the extend to which buildings are used. Types of unemployment There are four (4) basic types of unemployment. They are as follows: Cyclical Unemployment Seasonal Unemployment
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 Frictional Unemployment Structural Unemployment While all these four applies to all factors of productions, they tend to be most important for labour.

Cyclical Unemployment:

This is the type of unemployment attributed to the general decline in macroeconomic activity during a business-cycle, contraction or recession. This type of unemployment occurs when aggregate demand falls and wages and prices have not yet adjusted to restore full employment. During recession, fewer goods and services are purchased on the aggregate and employers reduce production and the number of workers.

Seasonal Unemployment:

This is the unemployment which comes and goes with the seasons of the year i.e. it is occasioned by seasonal vacations. For example, construction workers are after unemployed during the wet or winter season. Local farmers in most less developed countries (LOCs) are usually employed during the planting and harvesting seasons and unemployed in the other periods.

Frictional Unemployment:

Unemployment here results because resources are in the process of moving for production activity to another. Frictional unemployment occurs because it takes time to move between production activities. The time needed to match up resources with production depends on information availability and the degree of geographic separation. Structural Unemployment This type of unemployment is occasioned by structural changes in the economy, which renders some workers unsuitable because their skills do not match the need of the labour market. It occurs because resources do not have the technological configuration, skills, or training required by production activity. For example, a construction company may be in need of a carpenter but the only available unemployed worker is a plumber. If the only jobs available to the plumber is carpentry; then the plumber is structurally unemployed. The key to frictional and structural unemployment is that the number of jobs available is equal to the number of workers. In other words, Qd=Qs. The problem is that the workers and the jobs do not match up, either information is lacking or skills are incompatible. Whether frictional and structural unemployment are good or bad, when combined they form the basis for a key benchmark for macroeconomic policy analysis
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termed

the

Natural

Unemployment Rate. Because the natural unemployment rate can be sustained with no changes in inflation, it provides an excellent target for macroeconomic policy. POLICIES Given that people would rather not have unemployment and that it tends to increase from time to time, an assortment of government policies have been devised to reduce unemployment. The most noted:

Fiscal policy; and Monetary policy

Fall under the general heading of stabilization policies that are designed to stabilize business-cycle fluctuations and in so doing lessen the problem of unemployment. Fiscal policy

Fiscal policy is the discretionary use of government spending and taxes to affect business-cycle fluctuations. The recommended fiscal policy for reducing unemployment is to increase government spending and to reduce taxes. When undertaken by the Federal Government, either or both of these actions lead to an increase in the Federal deficit or a decrease in the Federal surplus.
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Monetary Policy

Monetary policy is use of the money supply and the interest rates to affect business-cycle fluctuations. The recommended monetary policy for reducing unemployment is to increase the money supply and to decrease interest rates. In short, fiscal and monetary policies could be used to boost aggregate demand in the short-run. However, a more lasting solution to the unemployment problem will have to entail reducing the natural rate of unemployment. Expansionary fiscal and monetary policies can reduce the cyclical unemployment by stimulating aggregate demand in the short-run but in the long-run, the performance can only be improved by increasing the level of full employment and potential output. To reduce the natural rate of unemployment calls for policies that impact on the supply-side of the economy which entails the employment of microeconomic policies and incentives. They are:

Introducing Investment Subsidies or Tax Breaks:

With this, it tends to encourage entrepreneurship and hence, lead to an expansion in production and employment.

Reducing The Marginal Rate of Taxation:

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Reduction in the marginal rate of taxation stimulates incentives to work (since take-home-pay is now increased) encourage people to invest, innovate and take risks (since profit after tax is now bigger) which can lead to expansions in output and income.

Policies

that

Reduce

Frictional

and

Structural

Unemployment: For example, training facilities may be established to help redundant workers acquire relevant skills. The government may fund specialized agencies like the National Directorate of Employment (NDE) to train young school-leavers to acquire skills for self-employment or necessary to get jobs in the labour market.

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