Friday, April 26, 2013


MACROECONOMIC POLICY TO REDUCE UNEMPLOYMENT Introduction Over the period, the menace of unemployment has continued to be one of the critical problems facing the establishment of the economy. The performance of the economy of any nation is largely dependent on the prevailing of unemployment rates. Unemployment generally occurs in the economy when the number of there is a given percentages of the population willing and able to work are rendered jobless in the economy. The measure of unemployment in the economy is generally considered through the aspect of employment rates and this differs between various nations and over time period. The global statistics conducted by the international labor organizations has revealed that 6% of world’s workforce is unemployed (KAUFMAN, 2012). The development of unemployment in the economy is extremely detrimental and various policies have been established to ensure that the rates of unemployment are reduced in the economy. These policies include fiscal and monetary policies. Generally, both of these policies are employed to solve the problem of unemployment through their activity in increasing the value of aggregate demand and economic growth. The study of analytical results from the department of labor has provided critical insights in the prevalence of the pandemic that involves the development of labor standards. The establishment of the factors of economic development has been identified as some of the factors that results into the growth of employment rates. An insight in the problem of unemployment is highlighted by the use of the following graph. Source (Bureau of labor statistics, 2013). According to the graph, it is evident that the development and the depiction of unemployment rates in the economy normally fluctuate depending on the performance of the economy. The periods of the recent past has witnessed the development of various macroeconomic policies that are aimed at establishing full employment. The establishment of full employment is the ultimate goal of economic policy and this situation is characterized by the dominance of the employment opportunities for all the members willing and able to work under the prevailing conditions. Certainly, the challenges involved in the management of the economic attributes results in the establishment unemployment in the economy (Kerdrain, Koske & Wanner, 2011). The realization of these factors has enhanced the development of the fact that unemployment can occur in the economy because of various factors and this has resulted in the classification of unemployment into different classes. Structural unemployment These cases of unemployment are realized due to the changes in the structures of the market. Some of the leading elements that may lead to the attributes of these changes are technological advancements and innovations. An example to highlight this case is the emergence of technological advancement leading to the demand of trained mechanics and reduction in the demand for the untrained mechanics (Kerdrain, Koske & Wanner, 2011). This consideration is beneficial because it results in the consideration of rendering a critical number of populations jobless. Frictional unemployment The class of frictional unemployment occurs when people are switching between jobs and it denotes the range of people unemployed for a period of time when they are locating new jobs in the market. The attributes of frictional unemployment results due to lack of information during the search for better jobs and also due to the change of geographical locations (LEI LEI & FREEBAIRN, 2005). The workers usually spend some time in the search of better jobs and this duration of unemployment when the individual is locating new job is denoted as frictional unemployment. Cyclical unemployment The attributes of cyclical unemployment occurs due to the fluctuation in the economy that results in the downturns of the business activities. This is largely caused by the decline in the performance of the existing market policies and the dominance of disparities sin the economy. Finally, it is often difficult for the market to obtain full employment because a given range of unemployment is beneficial for the growth of the economy. To some extent, the rates of unemployment become beneficial in spurring the rate of growth. The situation of full employment cannot be realized in the economy because of the proponents of imperfect information in the market and the existence of the job shopping by the population. In this regard, every global nation has its own natural rate of unemployment and the existing natural rate of unemployment in the United States is given as 5%. Inflexibility of the labor market has been cited as one of the reasons that has enabled the growth and development of unemployment in the economy. Inflexibility of labor refers the atrocities and disparities facing the adjustments of labor to changing factors of the economy. The development of these factors has continued to be a critical challenge because it depicts the aspect of development that is entitled in the consideration of development (LEI LEI & FREEBAIRN, 2005). Over the period, the global regime has continued to derive critical development and this has largely affected the establishment of disparities thereby resulting in the development of new technologies and economic growth. It is extremely beneficial for the labor market to respond to these changes in the market and failure to respond to these changes results in the aspect of labor inflexibility. Labor inflexibility results in the development of unemployment and further leads to the reduction in the implementation of the policies. The existing tradeoffs in the labor market have been established to compose of factors like the unemployment and lay off of workers. The following is the table that highlights the employment statistics in the United States. This table confirms that the unemployment rates in the economy are based on the fluctuation on the establishment of the market forces that enhances the aspects of fluctuations thereby resulting in the changes of unemployment. Source (ROTHSTEIN, 2012). Rising rates of unemployment are extremely detrimental for the economy and they result in the reduction of the growth of the economy. Employment is harmful to the economy because it reduces the attributes of economic growth by a critical margin because it has the impact of reducing personal consumption and aggregate demand. These two components are extremely beneficial because they result in the development of the economy through the increase in consumption, personal income and finally through increased investment opportunity (Langdana, 2009). On the other hand, high unemployment rates are detrimental to the society because it reduces the capacity of society welfare realization. In the wake of these disparities associated with unemployment, it is extremely beneficial for the economic planners to initiate development of restricting polices. Policies for reducing unemployment Analytical records have shown that there are two main polices that are used in the reduction of unemployment and these strategies have also been identified to be applicable in their respect of occurrence. Attributes of unemployment encompasses the development of demand side policies and supply side policies. The enactment of these policies is crucial because there are various causes of unemployment in the economy (Ravier, 2011). The usage of the demand side policies is particularly beneficial when the economy is experiencing recession that results in the rise n the cases of cyclical unemployment. An example of unemployment cases that required the use of fiscal policies is the rise in the global recession due 1991 and 2008 recessions. The consideration of the demand side polices is highlighted below. 1. Fiscal policies The usages of fiscal policies have proven to be extremely beneficial in reducing the prevalence of unemployment in the economy because they have the attribute of increasing the aggregate demand and the prevailing rate of economic growth. In order to increase the rates of employment in the economy, the government must enact the aspects of expansionary fiscal policies that will lead to the increase in the amount of disposable income. Some of the attributes of ensuring the development of these expansionary policies includes the reduction in tax rates and the increase in government spending (Dumiter, 2012). Fiscal policy has been adopted by the governments as a measure of increasing employment rates because it results in the increase of aggregate demand through the increase in consumption. The basis behind this development is the fact that Ad lead to the increase in the GDP. With the increase in the GDP, firms in the economy will increase their capacity to produce and this lead to the call of the more employment opportunities. Furthermore, the establishment of high AD results in the development of economic stability thereby leading to the future development of the firms and jobs losses is not foreseeable in such economic attributes. The development and establishment of the expansionary fiscal policies was championed by the economist john May hard Keynes and he stated that these expansionary policies provides economic remedies during recession (Nazir, Anwar, Irshad & Shoukat, 2013). In his findings, he noted that recession leads to the decline in the performance of the resources and the intervention through expansionary fiscal policies leads to the development of resources and subsequent reduction in unemployment. The following is an illustration of the functionality of inflationary policies. Source (Dumiter, 2012). In view of the graph above, the existing value of AD during recession is depicted by AD in the graph and this is characterized by the prevalence of unemployment opportunities in the economy. The value of employment is given by the value of P1. However, the enactment of the expansionary fiscal policies results in the expansion of the value of AD to the new value of AD2 and this marks an increase in the value of employment opportunities as represented by the new value of P2. This figure clearly illustrates the contributions of fiscal policies in reducing the rates of unemployment in the economy. 2. Monetary policy Monetary policies have been used by various governments to reduce the rates of unemployment in their economies and the applications of ideal monetary policies have proven to the exceptional in the development of the economy. One of the critical monetary policies that have been used by many economies is the concept of lowering the interest rates. Lowering the amount of interests’ rates in the economy is critical for the aspect of development because it reduces the cost of borrowing and this encourages people in the economy to borrow money for development and investments. The increase in the amount of investments and spending is crucial for the realization of the economic growth because it has the capacity of increasing the rates amount of aggregate demand (ROTHSTEIN, 2012). On the other hand, increase in the aggregate demand is beneficial for the entire economy because it increases the development of the GDP and further reduces the capacity of the demand deficient unemployment. The enactment of the monetary policy leading to the lowering of interest rates is also beneficial because it results in the lowering of the exchange rates. This concept is essential because it increases the prices of the exports there leading to the increase of the value of export. Establishment of favorable balance of payment is realized when such scenario happens and this is a critical factor that increases employment rates and reduced unemployment rates in the economy. Other polices that are critical in reducing the rates of unemployment in the economy can be identified as the supply side factors and a range of policies have been implemented to ensure that the supply side unemployment are adequately reduced. 1. Training and education policy The enactment of this policy focuses on the empowerment of the unemployed with the skills necessary for the conduction of jobs in the market. Even though this is a long term strategy, it has been adopted as one of the policies to reduce unemployment rates (ROTHSTEIN, 2012). It also helps the workers in maintain their current jobs by empowering them with the knowledge about the structural changes in the market. 2. Reduction of the powers of the trade unions The activities of the trade unions may also lead to the prevalence of unemployment because they may bargain for the wages above the market prices and this may have the impact of causing real wage unemployment in the economy. In such a case, reduction of the powers and privileges of trade unions will have the impact of reducing the real wages thereby solving the problems of real wage unemployment which is detrimental to the economy. 3. Employment subsidies polices The government of the nation may also enact some employment policies that will be critical in regulating unemployment rates in the economy. In the cases where the economy is experiencing high unemployment rates, the government may initiate the enactment of the policy that offers tax reliefs for the firms offering long term employment to their workers and this will help in reducing the rate of unemployment in the economy. 4. The policy to improve the flexibility of the labor market High structural rates in the market may serve as a basis for the existence of unemployment because the restive labor market s has the effect of selecting the labor force. The enactment of the policy aimed at increasing labor flexibility will be extremely essential in the market and it will result in the increase in the number of people employed. In this regard, flexibility of the market is highly beneficial for the reduction of unemployment rates. Conclusion The establishment of economic performance is beneficial for the economy because it leads to the rise in living standards amongst other benefits. Economists of various nations have employed measure to ensure that economic growth is achieved. One aspect of achieving this is the reduction of unemployment rates. Various policies have been enacted to reduce unemployment rates and these include fiscal policies and monetary policies. Inflationary fiscal policies have proven to be ideal in reducing unemployment rates and the various monetary policies like the reduction of the interest rates has also been of immense benefits in controlling unemployment rates. In conclusion, these policies highlighted are extremely crucial in reducing the rates of unemployment in the economies. References Bureau of labor statistics (2013) Retrieved on 23rd April from Dumiter, F. (2012). THE CRUCIAL ROLE OF CENTRAL BANK TRANSPARENCY IN ASSESSING THE MONETARY POLICY COMMITTEE MECHANISM. Annals Of The University Of Oradea, Economic Science Series, 21(2), 557-563. KAUFMAN, B. E. (2012). WAGE THEORY, NEW DEAL LABOR POLICY, AND THE GREAT DEPRESSION: WERE GOVERNMENT AND UNIONS TO BLAME?. Industrial & Labor Relations Review, 65(3), 501-532. Kerdrain, C., Koske, I., & Wanner, I. (2011). Current Account Imbalances: Can Structural Reforms Help to Reduce Them?. OECD Journal: Economic Studies, 2011(1), 31-74. Langdana, F. K. (2009). Macroeconomic Policy : Demystifying Monetary and Fiscal Policy. [N.p.]: Springer Science & Business Media. LEI LEI, S., & FREEBAIRN, J. (2005). Policies to Reduce Unemployment: Simulations with Treasury Macroeconomic Model. Economic Record, 81(255), 351-366. doi:10.1111/j.1475-4932.2005.00274.x Nazir, R., Anwar, M., Irshad, M., & Shoukat, A. (2013). Does Fiscal Policy Matters for Growth? Empirical Evidence from Pakistan. International Journal Of Economics & Finance, 5(3), 205-212. Ravier, A. O. (2011). RETHINKING CAPITAL-BASED MACROECONOMICS. Quarterly Journal Of Austrian Economics, 14(3), 347-375. ROTHSTEIN, J. (2012). THE LABOR MARKET FOUR YEARS INTO THE CRISIS: ASSESSING STRUCTURAL EXPLANATIONS. Industrial & Labor Relations Review, 65(3), 467-500.