Essay on ECONOMICS: The Challenges of Unemployment
Unemployment is a form of manifestation of macroeconomic instability expressed in excess of supply over demand of labor, when the economically active population is not engaged in economic activity in the country despite active search for job and willingness to work. Obviously, with the incomplete use of the available manpower resources economic system works not reaching its production capacity limits, and any economic growth in the country is out of the question. Thus, unemployment entails a significant reduction in potential gross product and national income. According to Okun’s law the increase in actual unemployment by 1% compared to its natural rate leads to 2.5% loss of GNP, which further manifests in the reduction of total consumption, savings and investment, general increase of social burden and uneven distribution of unemployment costs among different population groups, and overall reduction of households’ welfare (Verhaar & Jansma, 2014, p. 82). In addition, the rise in unemployment causes worsening of crime situation, worsening of growth dynamics of public interest in labor, as well as loss of qualifications of able-bodied citizens.
By the end of 2013 there were nearly 202 million unemployed in the world, that is, about five million more than in the previous year (Nattrass, 2014, p. 90). This especially harmed 74.5 million young people aged 15 to 24, which is a million more than in the previous year (Nattrass, 2014, p. 91). If governments continue to do nothing and do not deal with the crisis of youth employment, stagnant unemployment and other problems of the labor market, this may lead to further social tensions. Thus, unemployment is currently one of the most serious challenges that contemporary economies must overcome. Further in this paper, we will examine the main types of unemployment and produce recommendations on preventing the development of factors causing them.
Major types of unemployment
All working-age population that is not working, but is looking for job is considered unemployed. The criteria for distinguishing the types of unemployment, as a rule, are the reasons for it.
Thus, involuntary or unemployment of expectations occurs when an employee is able and willing to work at a given wage, but cannot find a job. The reason is the imbalance in the labor market due to the inflexibility of wages (due to laws on minimum wages, trade union demands, raising wages to improve the quality of labor, etc.). When the real wage is above the level corresponding to the balance of supply and demand, labor supply exceeds demand. Number of applicants for a limited number of jobs increases, and the chance of real employment decreases, which increases unemployment rate. Varieties of involuntary unemployment include cyclic (caused by repetitive production decline in the country or region), seasonal (depends on fluctuations in the level of economic activity during the year, characteristic of some specific sectors of the economy), and technological (related to mechanization and automation of production, which resulted in part of labor power becoming superfluous, or requiring a higher skill level (Verhaar & Jansma, 2014). In turn, voluntary unemployment is related to the reluctance of people to work, for example under conditions of reduced wages. Voluntary unemployment increases during economic boom and decreases in recession. Also, there is a concept of “unemployment trap”, when a person’s income do not differ much, regardless of whether one works or not (due to deprivation of the right to appropriate compensation and fringe benefits, as well as significant payments of insurance premiums, etc.), which reduces a person’s interest to employment (Verhaar & Jansma, 2014, p. 128).
One of the key types of unemployment is structural unemployment which is caused by structural changes in the economy, such as changes in the structure of demand for products of different industries, consumer goods and production technologies, elimination of obsolete industries and professions (Nattrass, 2014). As a result, the structural mismatch occurs between the skills of the unemployed and demands of the available vacancies. This means that people who have a profession and skill levels that do not meet modern requirements and current industry structure, being laid off, cannot find a job. Together with frictional unemployment, structural unemployment forms a natural unemployment, which is compatible with the state of full employment, and the actual amount of production in this case is equal to the potential (Verhaar & Jansma, 2014, p. 98). Here, frictional unemployment implies unemployment associated with the process of changing jobs, i.e. voluntary abandonment of one job and the search for another. Frictional unemployed include the dismissed or ones who quit their job, pending restoring at previous job or having found a new job, but who have not started it. Frictional unemployment is a phenomenon not only inevitable but also desirable, as it promotes a more rational allocation of labor and higher productivity.
In addition, OECD experts (2010) distinguish institutional unemployment emerging in the case of state or unions intervention in setting the size of wage rates that differ from those that could be generated in the natural market economy, as well as marginal unemployment of poorly protected population layers and the lower classes, in particular unemployment among women, youth unemployment in a group of 18-25-year-olds, and unemployment among people with disabilities. Another serious problem is the presence of hidden unemployment as opposed to registered one, when the unemployment of potential workers is not reflected in official statistics. For example, as a result of production decline, labor force is often not used fully, but is not dismissed either. In latent unemployment, formally employed actually become unemployed persons. In addition, there is a separate layer of individuals wanting to work, but not registered as unemployed. Partly, hidden unemployment is represented by people who stopped looking for work (Verhaar & Jansma, 2014, p. 156).
The reduction of unemployment is an extremely challenging task namely due to the existence of a variety of its types. Theoretically, it is not possible to develop a common way of dealing with unemployment, and therefore any state is forced to use different methods to solve this problem, some of which are discussed below.
Overcoming unemployment
Common to all types of unemployment measures include creation of new jobs by stimulating small and large businesses, and establishment of labor exchanges and other types of employment services (Verhaar & Jansma, 2014; OECD, 2010; Blustein et al., 2012). However, in general, effective implementation of methods to overcome unemployment requires identifying the factors that determine the supply and demand of labor for each particular form of unemployment.
Thus, for example, measures to deal with frictional unemployment primarily include the improvement of the information supply system for the labor market and creation of special services for this (OECD, 2010, p. 41). It is obvious that if the unemployed does not have information on existing vacancies, one cannot get a job. To solve this problem there are labor exchanges, employment centers and other similar private or public organizations. Equally important are the systematic studies of the labor market, including the study of the structure of employment in the labor market of public entities, registered unemployment problems, problems of interaction between employees and employers, employment problems of certain categories of the population, organizational problems of employment service and its individual directions. In addition, various job fairs, open days and similar events can be held to increase awareness.
Fighting structural unemployment involves transformation of more complex mechanisms like providing opportunities for training and retraining of the unemployed, as well as protectionist measures to protect the domestic market (Blustein et al., 2012; OECD, 2010). In particular, protectionist measures help protect undeveloped and inefficient sectors of the economy of the country, reducing unemployment caused by the defeat of the enterprises in the competition. At the same time, as Blustein et al. (2012, p. 349) rightly note, this eventually reduces the competitiveness of national companies, undermines international trade, and monopolizes production leading to various negative consequences for the economy. Therefore, more efficient are the methods of economic diplomacy that also focuses on the development of the domestic market, but alongside is promoting national products in the foreign market, supporting investment projects in other countries and attracting foreign investment, providing the best terms of trade in foreign markets (McBride & Mustchin, 2013; OECD, 2010).
In addition, the development of vocational education and training of public services allows workers to improve their skills, thereby adapting them to changes in the labor market. Particular attention should be paid to scarce occupations and professions (McBride & Mustchin, 2013, p. 346). The disadvantage of this method is that it does not give quick results and increases inequality among workers, since the probability to get education increases in accord with the current job position (Nattrass, 2014, p. 92). Besides, unemployment caused by the decline in production and a sharp increase in the working population cannot be reduced in this way (OECD, 2010, p. 45).
The major means of combating cyclical unemployment are implementation of stabilization policy aimed at preventing the deep recessions of production and, consequently, mass unemployment, as well as creation of additional jobs in the public sector (McBride & Mustchin, 2013; Blustein et al., 2012). Direct job creation through public spending is often formed by execution of public interest work, for example, in the field of environmental protection, road and railway construction, clearing debris from places of residence and so on. This approach is part of the Keynesian model of the economy, and it proved to be effective during the Great Depression in the United States. In total, in the 1933-1939 in the United States the number of employees in public works for the construction of canals, roads, and bridges reached 4 million people (Verhaar & Jansma, 2014, p. 183).
An important aspect in overcoming unemployment, particularly voluntary and hidden, is holding indirect labor market policy aimed at the formation of a certain attitude to unemployment in society, and smoothing its negative effects, as McBride and Mustchin (2013, p. 343) mark. Administrative employment regulation should include the ensuring of legal protection of employees, using of alternative forms of employment, developing unemployment insurance system, simplifying registration of the unemployed at employment services, strengthening guarantees in terms of payment for work and addressing arrears of wages, as well as introduction of effective protection system for wage workers through the mechanism of social partnership (Blustein et al., 2012; OECD, 2010; Nattrass, 2014). Here, in addition of flexible and non-traditional forms of employment providing the possibility or works to choose the optimal working schedule, it is also necessary to use the world experience of job-sharing and work-sharing in time and space. In turn, the system of social partnership is designed to provide negotiation to determine the minimum wage, and in some cases – to establish criteria for increasing wages at the industry or company level within the framework of the national policy of income and employment.
Conclusion
Since unemployment is a serious macroeconomic problem and an indicator of macroeconomic instability, the state must take measures to fight it. However, ways to overcome unemployment are directly depend on the unemployment types, because they are caused by different reasons. In our view, the factor-based policy is one of the most effective, as it interprets unemployment in the full range of its manifestations. In particular, measures to deal with frictional unemployment primarily include the improvement of the information supply system for the labor market and creation of special services for this, while structural unemployment involves the provision of wide opportunities for training and retraining of the unemployed, as well as economic diplomacy measures aimed at domestic market protection and attraction of investments. Cyclical and hidden unemployment could be prevented through the mechanism of administrative regulation, development of social partnership system and creation of additional jobs in the public sector.
At the same time, individual events cannot completely eliminate the risk of unemployment and its growth: this can be achieved only in the overall improvement of the economic situation in the country. Therefore, the national policy to combat unemployment should focus on the long term, providing not only population employment, but also stable economic growth.
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