Theories of Unemployment

According to Investopedia unemployment occurs when a person who is actively searching for employment is unable to find work (unemployment, n.d.). This problem is caused by lack of skills, capital, employment opportunities and qualifications (unemployment, n.d.). It also stems from loss of jobs to machine/technology, people’s unwillingness to work and economic downturn. Unemployment itself can cause other problems, for example human resources, crime and social unrest. (Durueke, 2012) Unemployment is often used as a measure of the wealth of the economy. The most frequently cited measure of unemployment is the unemployment rate, this is the number of unemployed persons divided by the number of people in the labour force (unemployment, n.d.). The current unemployment rate is 14.3% and it’s the main cause of poverty. When everyone is employed it usually means that there is an equality of opportunities to work by the free availability of land and capital. However when either of the two factors of production is limited or stopped, unemployment will result along with poverty, thus making it an economic issue (htt1).

When the economy is not doing well businesses lay off workers, this causes even more people to be unemployed and not only are the unemployed not working, and therefore not contributing to the economy, but they will also be claiming benefits and costing the government money. People who are unemployed changes their spending habits and normally pay only bills that are necessary and don’t spend on things that aren’t absolutely necessary.

Review economic theories on unemployment

Economic theory, as well as historical record, tells us that unemployment is not just a tragedy for the single unemployed worker and their dependents; it is an economic problem that affects the whole. This is especially true when lots of workers do not have jobs (htt2). Unemployment rate, when high will slow the entire economy down .A high unemployment rate is not just a problem for the unemployed; it is also a problem for those who are still working (htt2). The burden of providing the money for government services, in the form of taxes, falls increasingly upon those still employed when large numbers of people are not working (htt2).

Yet unemployment, like most things that affect the economy, is not all bad when the whole economic system (macroeconomics) is studied (htt2). For instance, from the viewpoint of an employer, a high unemployment rate creates an advantage; it gives them a wide range of applicants for any job opening that they have available, and it also helps decrease the amount of wages that an employer has to pay their employees (htt2). In economic lingo, high unemployment creates a labor surplus. Conversely a low unemployment rate results is less choices when selecting workers and being forced to increase wages; this in turn will affect the whole economy by driving up prices on goods and services. It is for these reasons that economists sometimes debate what the ideal unemployment rate should be for an economy (htt2). Both high and low unemployment rates create problems for the economy (htt2) (Eckstein, 2009)

The Classical Theory of Unemployment

Figure 1: A Supply and Demand Model for Labor. In a smoothly functioning <a href=’/article/Market’ title=’Market’>market</a>, the equilibrium wage and quantity of labor would be set by market forces. (Source: <a href=’http://ase.tufts.edu/gdae/’ class=’external text’ title=’http://ase.tufts.edu/gdae/’ rel=’nofollow’>GDAE</a>)Figure 1: A Supply and Demand Model for Labor. In a smoothly functioning market, the equilibrium wage and quantity of labor would be set by market forces (htt3) (Source: GDAE)

In Classical economic theory, unemployment is seen as a sign that smooth labor market functioning is being obstructed in some way (htt3). The Classical approach assumes that markets behave as described by the idealized supply-and-demand model: the labor market is seen as though it were a single, static market, characterized by perfect competition, spot transactions, and institutions for double-auction bidding (htt3).

Such an abstract labor market is depicted in Figure 1. In this case “quantity” is not measured as a number of things (like apartments or swimsuits) but rather a quantity of labor services (htt3). We can think of this quantity as being measured, for example, by the number of workers working full days over a given time period. The “price” of labor is the (real) wage (in this case, per day) (htt3). Workers supply labor, while employers demand it. We assume that every unit of labor services is the same, and every worker in this market will get exactly the same wage. The equilibrium wage in this example is WE and the equilibrium quantity of labor supplied is at LE (htt3). In Figure 1, where the market is free to adjust, there is no involuntary unemployment. Everyone who wants a job at the going wage gets one. There may be many people who would offer their services on this market if the wage were higher-as the portion of the supply curve to the right of LE demonstrates (htt3). But, given the currently offered wage rate, these people have made a rational choice not to participate in this labor market (2006).

Figure 2: Classical Unemployment. In a Classical (idealized) <a href=’/article/Market’ title=’Market’>market</a> for labor, the only thing that can cause true <a href=’/article/Types_of_unemployment’ title=’Types of unemployment’>unemployment</a> is something that interferes with the adjustments of <a href=’/w/index.php?title=Free_market&action=edit&redlink=1′ class=’new’ title=’Free market (page does not exist)’>free markets</a>, such as a legal minimum wage. (Source: <a href=’http://ase.tufts.edu/gdae/’ class=’external text’ title=’http://ase.tufts.edu/gdae/’ rel=’nofollow’>GDAE</a>)Figure 2: Classical Unemployment. In a Classical (idealized) market for labor, the only thing that can cause true unemployment is something that interferes with the adjustments of free markets, such as a legal minimum wage (htt3).

Within the Classical model, the only way true, involuntary unemployment can exist is if something gets in the way of market forces. The presence of a legal minimum wage is commonly pointed to as one such factor. As illustrated in Figure 2, if employers are required to pay a minimum wage of W* (“W-star”) that is above the equilibrium wage, this model predicts that they will hire fewer workers (htt3). At an artificially high wage W*, employers want to hire only LD workers. But at that wage, LS people want jobs (htt3). There is a situation of surplus (htt3). The market is, in this case, prevented from adjusting to equilibrium by legal restrictions on employers. Now there are people who want a job at the going wage, but can’t find one. That is, they are unemployed (htt3).

The minimum wage only affects a portion of the workforce, however-people who are relatively unskilled, including many teenagers. But unemployment tends to affect people at all wage levels (htt3). Classical economists suggest other “market interference” reasons for unemployment, as well (htt3). The economy might provide less than the optimal number of jobs, they believe, because:

regulations on businesses reduce their growth, restricting growth in the demand for labor

labor-related regulations (such as safety regulations, mandated benefits, or restrictions on layoffs and firings) and labor union activities increase the cost of labor to businesses, causing them to turn towards labor-saving technologies and thus reducing job growth

public “safety net” policies such as disability insurance and unemployment insurance reduces employment by causing people to become less willing to seek work (htt3)(Cleveland, 2006)

The Keynesian theory of unemployment is that an increase in unemployment reduces income, which reduces consumption, and reduces aggregate output (keynesian, 2010). Individuals base decisions on current income receipts (keynesian, 2010). Unemployment benefits thus serve to compensate the job loser from the fall in income. In the Keynesian theory, unemployment could be reduced if money wages were to decline (keynesian, 2010). However, money wages are fixed by institutional datum (keynesian, 2010). Unemployment compensation is necessary to prevent further reductions in real output because consumption is based on current income receipts (keynesian, 2010). Keynesian theory implies that increases in unemployment compensation have a simulative effect on the economy (keynesian, 2010) (Hendrickson, 2010)

Recommend economic concepts or interventions that could be employed to correct unemployment

Unemployment cannot be terminated, but it can be reduced first by reforming our education system to the extent that in our education system to the extent that in addition to academics, hands- on skills become compulsory for all students. An improvement in the employability of the labour supply – so that the unemployed have the right skills to take up the available job opportunities. Policies should focus on improving the occupational mobility of labour (tutor2u, n.d.). Improving skills and reducing occupational immobility Policies should provide the unemployed with the skills they need to find re-employment and improve the incentives to find work (tutor2u, n.d.). Structural unemployment is the result of workers being occupationally immobile – improvements in education and training will increase the human capital of these workers, and therefore give them a better chance of taking the new jobs that become available in the economy An improvement in the incentives for people to search and then accept paid work – this may require some reforms of the tax and benefits system (tutor2u, n.d.) (limited). (limited) Economic dualism should also be dealt with, economic dualism is a situation in which one sector of the economy, for example, telecommunications is more advanced, while another, say agriculture remains undeveloped. It is imperative that the government and the rich start extensive farming in Jamaica and of course this can create employment opportunities for many youth. Lower interest rates so that many Jamaicans can feel free to borrow for our banks in order to create businesses, thus creating jobs for others. We should consume what we produce, thereby pumping money into local businesses, which will in turn expand their businesses to the point of employing more Jamaicans. (Durueke, 2012)

Reflating Aggregate Demand

The government can also use macro-economic policies to increase the level of aggregate demand (tutor2u, n.d.). These policies might involve lower interest rates or lower direct taxes (tutor2u, n.d.). It might also encourage foreign investment into the economy from foreign multinational companies (tutor2u, n.d.). In the diagram below we see an increase in aggregate demand leading to an expansion of aggregate supply. Because of the increase in demand for output, the demand for labour at each wage rate will grow – leading to an increase in total employment (tutor2u, n.d.). http://www.tutor2u.net/economics/content/diagrams/unemployment10.gif

Not every increase in demand and production has to be met by using more labour (tutor2u, n.d.). Each year we expect to see a rise in labour productivity (more output per worker employed (tutor2u, n.d.)). And, businesses may decide to increase production by making greater use of capital inputs (machinery and technology) (limited)

Crime, including violent crime, is a serious problem in Jamaica, particularly in Kingston and Montego Bay, two of our major industries and work cities. This issue needs to be addressed because unemployment contributes greatly to crime. When crime is addressed it will lead to more foreign investment and the expansion of industries.

Benefits of Applying the Economics concepts above…..

With the creation of jobs there will be a reduction in crime and violence as fewer people will be idling, thus making investors considering Jamaica as a place to invest.

By facilitating the entry of skilled people into the productive sectors of an economy, and enabling the economy to sustain or increase productivity and competitiveness in the global market place.

Putting more into agriculture will facilitate more export of primary agriculture products to UK and North America, to a service economy in which tourism is now the principal earnings of foreign exchange.

Recommendations

While the government of Jamaica seeks to create avenues for the improvement of the economy by using strategies to reduce unemployment, we can reduce unemployment by creating work at home;

Baby sitting

Repairing, sewing and altering clothes

Crafts such as- pottery, knitting, quilting, crocheting, making candles, soaps and even offer classes in these areas. Let’s work to turning these skills into bigger industries.

Teacher at home who are currently unemployed work out of home; offer music class and tutoring.

House wife with no skills can sell their home grown flowers and vegetables or offer room and board.

It is also ample time that the government considers charging the richer population more on taxes and the poorer population less on taxes. I completely agree with Karl Samuda when he stated that, “to solve the problem of unemployment we need to provide a society and a macroeconomic framework that will encourage people to invest in the country (jamaica gleaner, 2004). Only through investment and the creation of a new business will we find it necessary to provide jobs for all those who are unemployed (jamaica gleaner, 2004).

Conclusion

Jamaica is in serious economic problem where unemployment is concerned as employment is not limited to a person’s financial security, it also affects their emotional stability, psyche, family relation and eventually leading to crime and violence. Unemployment is not caused by one affecting factor but by a variety of reasons like educational qualification and relevant skills. Unemployment cannot be solved but can only be reduced which in a sense is not a bad thing, as the economy needs some amount of unemployment in order to strive. More emphasis should be place in educating people, teaching of skills and most importantly, the creating of jobs.

Introduction

The objective of this research is to outline an economic issue in Jamaica, review theories about this same issue, recommend economic concepts or interventions that could correct this issue and out like the benefits of using those concepts and intervention. Unemployment is the economic issue selected because according to politics.co.uk, unemployment is an economic indicator that refers to the number or proportion of people in an economy who are willing and able to work, but are unable to get a job; a person in this situation is said to be unemployed (reference, n.d.). The researches uses the objectives listed above as guide lines in obtaining information from articles and web pages to show that unemployment is a growing problem to the Jamaican economy and offer solutions to reduce this problem.

Table of contents

Pages

Introduction

What is unemployment and why it is considered and economic issue

Reviews of economic concepts to correct the issue of unemployment

Recommended economics concepts to correct the issue of unemployment

Benefits of the concepts recommended

Recommendations

Conclusion

Appendices

Bibliography

Bibliography

Cleveland, C. (2006, 11 03). Theories of unemployment. Retrieved 11 15, 2012, from www.eoearth.org/: http://www.eoearth.org/article/Theories_of_unemployment

Durueke, U. (2012, 04 25). Reducing unemployment. Retrieved 11 15, 2012, from www.jamaicaobserver.com: http://www.jamaicaobserver.com/letters/Reducing-unemployment_11331205

Eckstein, M. D. (2009, 8 11). Economic Theory: Advantages and Disadvantages of Unemployment. Retrieved 11 15, 2012, from voices.yahoo.com: http://voices.yahoo.com/economic-theory-advantages-disadvantages-unemployment-4045389.html?cat=3

Hendrickson, J. (2010, 05 02). The everyday economist. Retrieved 11 15, 2012, from everydayecon.wordpress.com: http://everydayecon.wordpress.com/2010/06/02/keynesians-monetarists-and-unemployment/

limited, T. (n.d.). tutor2u- unemployment- policies to reduce unemployment. Retrieved 11 16, 2012, from www.tutor2u.net: http://www.tutor2u.net/economics/content/topics/unemp/unemp_policies.htm