Unemployment: Principles of Economics Assignments

Unemployment is one of the most urgent and complicated problems nowadays. More and more people are left without work because of technical development that leads to the decrease of economic prosperity of a country. However, what else makes unemployment so relevant?

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According to Layard, Nickell, and Jackman (2005), unemployment reduces output and aggregate income. It erodes human capital and involves psychic costs. The lack of employment leads to low self-esteem and leisure. Thus, alongside with economic consequences, unemployment may cause personal changes and moral degradation.

In economics, unemployment is defined as a situation where people of working age (labor force) are cannot get a job but want to be hired in full time employment. In theory, the stock of unemployment describes the economy at a particular moment. It is easily described via formula 1.1 (Knight, 1987):

image1.jpg, where:


Formula 1.2 shows the economy in percentage terms by dividing through Lt:


Economists from all over the world broadly discuss the question of theories of unemployment. These theories arise from the causes which lead to unemployment. According to such theories, economists divided into four big groups or so-called schools: the followers of cyclical unemployment, which is also known as Keynesian theory, frictional and structural unemployment, classical theory, and voluntary unemployment.

Classical or real-wage unemployment describes the situation, in which real wages are put above the market equilibrium, leading the amount of job-seekers to exceed the number of vacancies. The followers of this theory suggest that increase in unemployment provides deepening in government control by intervention and material help to those who are without jobs at the moment. The bright examples of such intervention are numerous laws about minimal wages that exist in every developed country. However, the disadvantage of these laws is that enterprises unwillingly hire someone new and create new job-places as they are exposed to higher risks. Therefore, it leaves more people unable to find a job.

In the book Out of Work: Unemployment and Government in the Twentieth-Century America (1997), Richard Vedder and Lowell Gallaway argue that the empirical record of unemployment, productivity, and wage rates in the US confirms the classical theory of unemployment.

Still, the classical theory is often criticized: it does not consider any external facts that may influence the rate of unemployment and simplifies the relation between wages and unemployment. Moreover, such simplification under modern globalization may cause an expensive miscalculation.

Frictional unemployment is another existing theory. It is a time between different jobs when a worker is looking for a job or transferring from one job to another. Frictional unemployment is connected with seasons and can be seen at resorts, where people work hard in hot period (for example summer) and search for another job during the rest of the year. Unlike other theories, this kind of unemployment always exists in the economy.

Structural unemployment is usually caused by a difference between the skills of unemployed workers and the skills required for the position. Other reasons why this kind of unemployment occurs include geographic immobility (a potential worker has some problems with moving to the place where work is available) or technological progress (the substitution of manual labor for automatic)

Another well-known theory is cyclical (Keynesian) unemployment. It happens when there is not enough aggregate demand to give jobs to everyone who is willing to work. In other words, it occurs when the demand exceeds the supply, which means that the economy is overheating. The brightest example of Keynesian unemployment was the Great Depression of the 1930s (when this notion was implemented). In this theory, government intervention is highly recommended as the economy is not able to recover without interference.

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Upon voluntary unemployment, the worker makes a decision not to take a job due to personal reasons, like moving to another city/country, low wage, etc. At the same time, those who were unwillingly fired due to the economic crisis, bankruptcy, or industrial decline also come under this theory. Both these groups are considered to be unemployed and willing to work.

After a thorough theoretical study, it is necessary to develop the ability of implementing the obtained information into practice. In order to summarize the theoretical background, one should analyze the following practical cases:

1. Two months ago, Marcelle used to work full time in an automobile manufacturing firm. "The factory where I used to work has closed because our market contracted so much, and so I was laid off. This is happening to people all over the country-all you see in the papers is that economic growth has fallen and incomes across the country have fallen. I have been looking very hard for a new job, but have had no luck yet."

It is obvious that Marcelle came is under voluntary unemployment. Though he did not quit his job, he was fired due to the fall of economic growth, which led to the shutting of the factory he had worked.

2. Until last week, Dominic used to work full time as a hair-dresser in downtown Cincinnati. "I decided to quit my job, because I want to move to New York City."

The situation with Dominic is also voluntary unemployment because it was her own decision, which she had made in order to move to another city. In this case, Dominic is not considered as a worker who is actively seeking a job but an unemployed specialist. Hence, while studying the theories of unemployment, her situation is included.

3. Until last month, Francine worked part time at a ski resort. "Well, it is summer now, and so the resort is closed. I will apply again in the winter when the snow is back. I am not interested in working until then."

Francines situation can be explained as frictional (season) unemployment. As the ski resort where he worked functions only in winter, it is obvious that Francine is unemployed in summer only because it is not the hot season.

4. Two months ago, Beauvoir had been working full time as a secretary. "I was a good typist, but I don't know how to use a computer. My boss wanted to upgrade the office to computers, and so I was replaced by someone who is computer-savvy. I have been looking for another job, but it appears that I need to learn some computer skills."

Beauvoir was fired because she was not qualified enough to work on the computer, though she is a good typist. Obviously, a mismatch between skills made her go under structural unemployment. As a result, Beauvoir has to raise her qualification.

According to the analyzed material, the significance of studying unemployment is obvious. Unemployment reflects the economic power of the national economy. Thus, it is not surprising that every government does its best in order to face and defeat such a powerful threat.

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