Causes for high rate of unemployment

Causes for high rate of unemployment

Introduction

Unemployment is one of the major economic problems that face many economies around the globe. Unemployment happens when active job seekers lack a job. The unemployment rate usually measures the prevalence of unemployment and it is calculated as a percentage by dividing all those people that are unemployed with those currently in the labor force. This paper delineates on the unemployment as an economic problem by focusing on some of its theoretical causes as well as other normal causes and possible solutions.

Causes of unemployment

Before embarking on the causes of unemployment, it is important to have a glimpse of the whole issue of unemployment across various regions across the world. The rate of unemployment is affecting almost all countries across the globe. This is because of increased rate of population and economic recessions as discussed further in the paper. International labor organization report indicated that close to 197 million people around the globe were out of the employment by 2012 (Sullivan & Steven 2003, p. 35). This is a worrying trend, since such rates of unemployment causes a burden to the economy and leads to other social problems such as insecurity.

One of the causes of unemployment results from classical unemployment. This kind of unemployment is caused in the circumstances where the real wages for a job are above the market clearing level. This causes the number of those people seeking jobs to exceed the available vacancies. Therefore, many people fail to get such jobs. Other ways through which job seekers fail to get a job is when the salaries set surpasses the value the workers brings to the organization (Glebbeek 1996, p. 12). Therefore, people end up losing jobs and becoming unemployed. This problem requires intervention of the government to improve the situation.

Keynesian or cyclical unemployment leads to many people failing to get a job. This kind of unemployment results due to lack of enough aggregate demand in the economy to provide employment for every person that is eligible for a job. When the demand of goods and services decreases, there is less production that is required, which requires less workers (Harris 2005, p. 23). Wages remain stagnant and do not meet the equilibrium level, which contributes to mass unemployment. The number of people unemployed exceeds the available number of vacancies so that in the event that full employment is attained, many people remain unemployed. This kind of unemployed is associated with frictional, unemployment since the factors that cause both of them are closely related (Krugman 1996, p. 116). This kind of unemployment can be caused by a surprise decrease in the supply of money, which causes shock in the rational economic factors that inhibit aggregate demand. Such kind of unemployment can be solved through government interventions, through deficit supply aimed at boosting demand and employment (Whaples 1991, p. 454). Other intervention is to expand the monetary policy in order to increase the money supply that will trigger reduction of interest rates that will lead to increase in the non-governmental spending.

Marxist theory on the other hand suggests that the cause of unemployment is the unstable capitalist system and the crises that results to mass unemployment capitalist; has contributed to unemployment. Unemployment does not increase the profits of the company. However, from a global capitalist system, unemployment is used as a stepping stone by companies to reduce the wages of the employees, which benefits the owners through increased profits (Marx, 2009, p. 45). Therefore, based on this perspective, unemployment contributes to reduction in economic rents but it does not benefit the workers as they receive low wage. Therefore, capitalists system lowers the market for labor through the reduced wages that makes potential employees to shun away. Marxist proposed a solution to such cause of unemployment by proposing shift from capitalist economic system to socialist or communist economic systems.

Structural unemployment is caused due to mismatch between the available skills and the skills of unemployed workers that the job needs (Centrum 2001, p. 3). Therefore, this makes some of the people to remain unemployed as not everybody has requisite skills to perform certain types of jobs. This kind of unemployment is encouraged to rise incase of persistent cyclical unemployment as it causes long lasting low aggregate demand. Therefore, because of the long duration, this kind of unemployment makes people to be disheartened and as they search jobs, in the long run their skills may be rendered obsolete when the economy recovers again. Therefore, this kind of unemployment contributed to the vicious circle of poverty due to increased debt and homelessness.

Technological unemployment is also part of structural unemployed. This unemployment is caused due to replacement of the worker by machines. Machines are able to produce more than workers are (Eissa, H 2005, p. 4). Such changes reduced the number of employees and this contributes to unemployment. Seasonal unemployment is also part of structural unemployment, which is associated witch construction, farm work, and migratory works. Such jobs are done for certain duration of time. For instance, when they get completed the contract comes to an end.

Frictional unemployment is the period between jobs when workers are searching for another job. It is a transition between one job to another and this is also called search unemployment and is based on circumstances of the unemployed people. This kind of unemployment is characterized in most of the economies to find out people in involuntary unemployment, the unemployment rate is subtracted from the rate of frictional unemployment (Keynes, 2007, p. 32). There are also hidden unemployed people. These potential workers are not captured in the filled unemployment statistics. Many countries statistics on unemployed represents those that are actively searching for job and those that qualify for the social, security benefits are the only ones that are counted as unemployed. Those under retaining program, disabled and those that have taken early retirement are not counted as unemployed. Therefore, this causes disparities in the total number of people that are unemployed.

There is long-term unemployment that is usually, defined in the European Union statistics. This unemployment last for longer period that is more than a year. This kind of unemployed is an indication of social exclusion as people are excluded from the available job because of various reasons such as, ethnicity, economic problems and political interest/differences. According to Hornstein, Lubik & Romero (2011), long-term unemployment rose dramatically during the recession and remains high. This then draws us to the attention of recession as a source of unemployment. Economic recession occurs when there is economic crisis whereby the cost of life becomes higher. During this period, most of the companies put a stop on their recruitment while others retrench and downsize their employees to be able to carry on with their operations. These retrenchment and downsizing contributes to the increased number of people that are unemployed. Recession also affects the performance of the economy and many companies close down owing to the tuff environment of doing business (Daniel, Bhashkar & Shani 2010, p. 28). When the companies close down, this causes increased level of unemployed as many people are rendered jobless. For instance, the recession that happened between 2007 and 2009 caused negative impact on the major important labor markets in the United States and other countries (Hornstein, Lubik & Romero 2011, p. 1). The rate of unemployment in United States clogged 10.1 percent in October 2009 and this percentage has remained around 9 percent through the recovery period. The rate of long-term unemployment has also increased nearing half of the unemployed workers percent have been unemployed for longer than 26 weeks (Hornstein, Lubik & Romero 2011, p. 1). Since the beginning of 2010 for instance, the share of long-term unemployment has also reached 40 percent and this percentage is peaking to nearly 46 percent in the second quarter of the years. This percentage is an indication of the effects that inflation can cause on the economy especially on the level of unemployed people in the country.

Countries such as United State have unemployment benefits that are provided to workers without jobs. Effects of recession contributed to the extension of such benefits. Such increases have impact on the long-term effects. Most countries with such provisions have allowed a maximum of 55 weeks insurance between 1981-82 (Hornstein, Lubik & Romero 2011, p. 1). By January 2012, individuals were eligible to collect their unemployment benefits for up to 99 weeks. Such extension are normally undertake to lessen the negative financial impact on unemployment of workers (The Bureau of Labor Statistics, 2011, para. 4). However, such initiatives hinder the incentives for people to look for a job in hope of getting a better offer. Therefore, this initiative therefore lowers the exit rate from unemployment and increase the rate of unemployment. Eligibility of unemployment cover requires a worker to be employed and then laid of involuntarily.

Implications for monetary policy

The relationship between unemployment and inflation indicates that the choice for monetary policymakers is clear. When the rate of unemployment is high, inflation is low; therefore, monetary policy should be expansionary rather than contractionary. However, many macroeconomists argue that the movement of quantities affects inflation to the extent that they operate from their ‘natural’ levels. Natural rate of unemployment is a kind of unemployment that occurs due to lack of distortion such as impediments through adjustments of nominal wages and prices. Unemployment gap is the difference between actual and natural rates also called slack on the economy. When the pool of unemployed workers to choose from is high and in a situation where the employment gap is positive, large wages are likely to increase, and this limits the pricing g pressures that comes from the rising input costs. The monetary policy makers consider this argument if they have the capability of discerning the natural rate.

According to Piet (2012), the high labor cost is one of the main resources that make firms to transfer their activities to other countries with low labor costs. No investor is ready to meet the high expenses in terms of salaries; instead, they opt to source their labor from those countries or home countries, which provide low salaries. This is one of the problem the have contributed to the high level of unemployment (Piet 2012, p. 981). People with requisite skills are denied an opportunity to work in such companies because they require high salaries that some of the companies are not able to meet such costs. High labor costs are one of the reasons that have contributed to unemployment in western countries. The labour cost is high because of the way social insurance is functioning. The system requires that every employed person contribute to the kitty. Thus increases the costs of labor, which contributes to high rate of unemployment.

In conclusion, unemployment is one of the economic problems that many countries across the globe continue to grapple with. Various causes lead to this situation. One of the causes is economic recessions, which cause the cost of living to increase. At such moments, the cost of doing business hike, and most of the employers look for ways to reduce this state. One of the steps is to reduce the number of employees through retrenchment or downsizing. Other companies stop recruiting more employees and this increases the rate of unemployment. Various theorists have also provided an insight on how this problem of unemployment arises. Such theorists include Keynesian, and Marxist. The government has the responsibility to intervene and reduce the prevalence of unemployment. Government can set policies that can help in reduction of the rate of unemployment through monetary expansionary strategies and many other strategies.

References List

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The Bureau of Labor Statistics, 2011, Revised its data-collection method for unemployment duration in January 2011. Based on the previous method, the average unemployment duration would be about 37 weeks rather than 40 weeks. For more information, see http://www.bls.gov/cps/duration.htm.

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