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Unemployment & Labor-Market

Unemployment has always been a problem in society where money, and therefore a source of money, is essential for survival. Those individuals who are not able to find work are left without resources and capital with which they can support themselves or a family. Unemployment acts as a negative influence on the economy as it displays a lack of productivity. However, it cannot be avoided. Some forms of unemployment will always exist, even in the most productive society, and the system today actually encourages some people to remain unemployed.

Desires to increase productivity, numbers of jobs, and number of people working do not always translate into lowering the unemployment rate. In this paper we will discuss the major problems and effects of Unemployment and solutions to those problems. Problem Statement – Part I First of all, those people who have given up looking due to frustration but are capable of working are not considered part of the labor force, and are given the term “disgruntled workers”. The number of disgruntled workers is not measurable in the unemployment rate, and each searching worker that becomes disgruntled lowers the unemployment rate.

Also, the single rate does not indicate how the job market is behaving across specific industries or demographic groups. That information is available, but is not usually reported to the public as frequently as the main unemployment rate. Lastly, the duration of unemployment, or how long someone is looking for a job, is not indicated in the unemployment rate. This information can be derived from the initial data using some probability theory and setting up a stochastic process as a model of behavior. That’s a barrel of fun, but unfortunately way too complicated and confusing for me to go into.

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There are several different kinds of unemployment to consider. Problem Statement – II As an industry changes and develops, skills needed for work change and the nature of the industry causes a change in the demand for workers. This is called structural or frictional employment. Structural unemployment refers to long term changes, while frictional is used for “short-run job matching skills”. (Bradley, 2003) Another term, cyclical unemployment, refers to changes (increases) in the unemployment rate during economic hard times. It cannot be avoided when the production is increasing as industries are shifting and changing.

In fact, “According to Marx, underemployment is a permanent feature of capitalism, a phenomenon deeply rooted in it, even though it emerges more or less strikingly according to the phases of the industrial cycle. This natural rate is often taken as the sum of frictional and structural and can be seen as independent of inflationary expectations. Discussion and Analysis So, how does the economy affect unemployment and vice versa? Some aspects of the economy operate independently of the job market, although just about everything is intertwined somehow.

The Phillips curve is used to link inflation to unemployment, giving that they exhibit a negative relationship. This curve satisfies a system of differential equations that has in the past modeled reality rather well. (Bradley, 2003) In most recent history (past twenty years) the relationship between inflation rates and unemployment rates has been erratic at best. As unemployment changes, so will the aggregate supply and demand of the society. Naturally, with more people working, the output will increase, and industry will be willing to supply more. Similarly, total demand increases as unemployment decreases.

The unemployment rate is determined from the working segment of the population. It is a good measure of the general trends of income and production, but is higher than it ought to be because of the uncounted disgruntled workers. (Farrington, David, 1986) These rates are ideally greater than zero, although excessive unemployment is obviously a great concern. The economy has a lot to do with the unemployment rate, as inflation, price levels, supply and demand, and many other factors have relationships with levels of employment. Inflation and unemployment have a direct impact on the aggregate demand of an economy.

The government uses a combination of monetary and fiscal policy to reduce inflation. Looking the example of the UK the government has lowered interest rates to encourage borrowing and increase the aggregate demand in the economy. This strategy has been successful as in 2001, 2002, 2003 the consumer spending was very high, which kept the economy going. With the better economic performance in 2004 the US government has raised the interest rates, which makes borrowing expensive. Solutions Through the use of the fiscal policy the government alters its expenditure and taxation to influence the economic activity.

An expansionary or deflationary policy could lead to reducing the levels of direct and in direct expenditure, which would increase the spending in the economy. (Western, Bruce, 1999) In our case when inflation is rising and unemployment is high the deflationary fiscal policy would increase taxation and cut the government expenditure to reduce the economic activity (Begg et al, 2000). Once demand is reduced the inflation levels would be reduced. Fiscal policy is an important tool for managing the economy since it can affect the total amount of output produced.

When the economy is in recession the idle productive capacity and unemployed workers the fiscal policy can be used to increase output without changing the price levels. Fiscal policy and monetary policy both work hand in hand to control the economy. Monetary policy affects all sectors of the economy while fiscal policy is targeted at certain actors in the economic systems (Begg et al, 2000) These include low-income households, large corporations, small and medium sized corporations. Monetary policy expansion is caused by the increase in consumer and capital spending which increase the national income level.

On the other hand expansionary fiscal policy leads to an increase in government spending which increases the aggregate demand. If the government borrowing is higher at this time it could lead to high interest rates, which would discourage investment. During a recession the business and economic confidence is low and in some cases monetary policy can be infecting in increase the spending and income. In such a situation the fiscal policy is more suitable as it stimulates demand. A good example is Japan where even zero interest rates could not enhance the economic output.


Begg, Fischer, Dornbusch, (2000) Economics, sixth edition, McGraw-Hill, England Bradley R. Schiller (2003) The Macro Economy Today 9th Edition Mc Graw Hill Irwin New York Farrington, David P. ; Gallagher, Bernard; Morley, Lynda; St. Ledger, Raymond j. ; and West, Donald J. “Unemployment, School-leaving, and Crime” British Journal of Criminology 26, no. 4 (1986): 335–356. Western, Bruce, And Beckett, Katherine, “How Unregulated Is the U. S. Labor Market? The U. S. Penal System as a Labor-Market Regulating Institution” American Journal of Sociology 104, no. 4 (1999): 1030–1060.

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