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Unemployment, Its Types and Government Intervention

Introduction

Unemployment is among the most significant challenges that influence contemporary economies. Indeed, even global economic giants suffer from the problem. For example, the 2008 to 2009 economic crisis in the US left the nation suffering from the problem of unemployment. After the recession, Rothstein and Valletta (2014) assert that unemployment was one of the major challenges faced by policy developers in the US and other nations that felt the impact of the crisis. Without adequate employment opportunities, the confidence of consumers decreases. To address the problem of inflation, unemployment, and recession, the government of the US adopted various measures such as increased expenditure to revamp the economic growth as the main strategy for increasing economic activities in the nation with the goal of reducing cyclical unemployment. Apart from the case of the US, using other cases such as Turkey and the UK, this paper argues that unemployment is currently one of the most serious challenges that present-day economies must conquer.

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The Main Types of Unemployment

Unemployment is a phenomenon whereby people within a nation continuously look for work without success. It refers to the fraction of the reasonably dynamic population that cannot find an employment opportunity. Economically energetic population or the labour force refers to the total number of people within a nation who have the willingness and capacity to work over a specific period (Marginson 2016). Willingness and ability to work mean that such people have the desire and are readily available to engage in constructive labour. To this extent, employed people may be viewed as those who are willing to work and have already secured a job. Unemployment rate determines the state of joblessness within a nation. The statistical figure is expressed as the percentage of the unemployed people over the total labour force. It is important to note here that the labour force does not include all people who are not willing or unable to work within a specified period, alternatively termed as non-economically vigorous people. Unemployment is of different types. The main ones are structural, cyclical, and frictional unemployment.

Structural Unemployment

The external environment in any country may experience various changes, including technological advancements that prompt the production sector to relieve some employees of their duties (Iwaisako 2016). This situation causes structural unemployment. In a more interactive way, Lahusen and Giugni (2016) define structural unemployment as a form of joblessness that arises from the mismatch between demand and supply of labour. Such mismatch comes from technological changes and other external environment factors.

A nation can experience a rising labour demand for some professions in certain sectors of the economy accompanied by a decrease in demand on others. The imbalances result in structural unemployment (Fedeli, Forte & Ricchi 2015). Legislation on minimum wages may also explain this type of unemployment (Lee & Park 2015). While the supply of labour may be high, organisations have no capacity to reduce wages to hire more people in response to the increased supply following the need to comply with legislations on minimum wage in some nations, including the US (Furman 2016). Employee unions may also bargain for high wages, a move that leads to imbalances between the supply and demand for labour and consequently structural unemployment.

Frictional Unemployment

Under the normal operations of an economy, the phenomenon of employee movements from one sector to another or from one job position to another is inevitable. This experience results in frictional unemployment. The incapacity to absorb people into new opportunities created emanates from inefficiencies in the information system where people are not able to immediately identify the available vacancies. Employers also need time to identify the unemployed people who can fill the created vacancies. Fang and MacPhail (2007) inform that frictional unemployment constitutes the least level of joblessness, which is found in any economy, irrespective of its rate of employment. Factors such as redundant payments and unemployment benefits may cause a mismatch between workers and jobs, especially where such benefits are more than what an available job opening offers. Considering that an economy will always have some people dropping jobs to search other opportunities, frictional employment is inevitable. Hence, no government policy can fully address the problem.

Cyclical Unemployment

Cyclical unemployment results from a decrease in the total demand for services coupled with goods in any economy. For example, the aforementioned economic recession in the US caused a slowdown of economic growth that led to reduced economic activities within the nation. This situation had the implication of causing cyclical unemployment since the nation was unable to absorb labour force due to the declined demand for goods and services. In the UK, the 2008 to 2009 global financial crisis resulted in the unemployment of over 2.5 million people in the last quarter of 2009 due to a reduction in the aggregate demand for jobs.

Recommendations to Manage the Phenomenon of Unemployment

Different mechanisms for addressing the problem of unemployment may be recommended depending on the causes of joblessness in any nation. For example, Turkey has a population of 68.1%, which has attained a working age. However, only 51.3% of the labour force actively engages in work (The Turkish economy 2013). Issues such as gender disparities when it comes to participation in employment may explain this situation. Indeed, by 2013, only 32.9% of women who had attained a working age were actually absorbed in the Turkish labour force. In 2013, Turkey had a youth unemployment rate of 17.3% for those aged 15-25 years (The Turkish economy 2013). Arguably, this challenge may be explained by low educational attainment. In fact, 8.8% of Turkish people aged 15 years and above have the tertiary level education. Consequently, Turkey is in a low position in terms of education attainment when compared to even lower income economic such as Philippines, Peru, and China. A tenable recommendation for addressing the problem of unemployment in Turkey entails investing in the education sector to ensure higher educational attainment, a move that may increase the employability of its citizens. Such intervention is a long-term strategy for ensuring that a nation has a large population that is employable, although the plan does not respond to a specific type of unemployment.

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Economic fluctuations within a nation lead to alternations in economic activities. Consequently, organisations may experience decreased aggregate demand for product and services, a situation that in turn results in increased unemployment levels. In such a situation, especially during an economic crisis, it is recommended that a nation should consider supply-side policies to help in boosting its economic growth. Supply-side policies reduce structural and frictional challenges that lead to unemployment (Sivy 2014). They also lower real wage unemployment. By increasing AS to AS2 as shown on Graph 1, supply-side guidelines guarantee sustainability in a nation’s economic growth. Sustainability is a necessary condition for increasing employment levels.

Supply-side policies augment the efficiency of nations (Goran 2014). This increment boosts not only a country’s ability to export but also its competitive advantage. Consequently, the demand for products and services produced by a nation increases, thus easing the problem of unemployment. This goal is realised occurs since people have more financial resources, which amplify their buying power. Thus, the outcome of supply-side policies entails increasing domestic consumption and export markets. To this extent, it can help to address the problem of cyclical unemployment.

Effects of Supply-side Policies on an Economy
Graph 1: Effects of Supply-side Policies on an Economy. Source: Łukasz (2014)

Contemporary economies can also respond to the problem of unemployment by ensuring low tariff barriers. The goal here is to raise trade while reducing welfare benefits to encourage the unemployed people to seek jobs to increase a nation’s production capacity (Kroft et al. 2015). Through the privatisation approach, supply-siders argue that people can acquire quality services at a competitive cost (Łukasz 2014). Supply-side economists argue that tax cuts increase the amount of money available to investors for channelling into invention activities to increase production levels and employment demands. Therefore, increased number of people who are taxed a small amount of money compensates for the reduction in revenues.

The Effect of Government Intervention

Governments can help to incredibly to address the problem of unemployment through various interventions. This possibility is perhaps well discussed through a case example of the US following the 2008-2009 economic downturn. Following this experience, the US began exploring “quantitative easing” approaches. Through the measures, the government increased its expenditure in an effort to boost economic growth in the long term. The US also continued to explore various mechanisms for rescuing insurers coupled with banks that were negatively impacted by the economic crisis. The main goal was to restore investors’ self-assurance and public conviction on the US economy (McVittie, McKinlay & Widdicombe 2015). For instance, FOMC resorted to buying the government securities to help in lowering interest rates while at the same time encouraging investments. Rising investments increases self-assurance and output levels (Łukasz 2014). Hence, through macroeconomic policies, the government of the United States attempted to revive and/or ensure economic success following the recession. In 2014, good news emerged that the nation had experienced a continuous economic growth during the first three years after the recession (Sivy 2014).

Challenges remained, despite the efforts by the government of the United States to address core problems such as unemployment. For example, since the recession, the nation had realised an economic growth of an average of about 2.25% (OECD economic outlook: general assessment of the macroeconomics situation 2014). Unemployment also remained well below its position. There were also budget problems, which also impeded high growth rates. The government adopted a fiscal cliff deal of about $1.1 trillion with the objective of reducing yearly deficits (Sivy 2014). Judging from the impact of the deal, it had done little to achieve its noble objective. Arguably, some of the deficits experienced by 2014 were related to the nominal effects of a weak economy.

Regardless of the challenges experienced by the US, with the economic recession notwithstanding, an incredible success had been achieved through the adoption of requisite fiscal policies. For instance, since 2012, unemployment began to reduce steadily. By January 2013, more than 155, 000 jobs were created, although the creation of jobs at the rate of 300, 000 new ones per year was necessary to eliminate unemployment levels in the right speed (Sivy 2014). Should rapid economic growth not show signs of occurring in the near future, a nation that wishes to boost employment through government interventions could focus on fiscal policies that seek to make money available at the hands of consumers. Such interventions may entail printing more money. Rising consumers’ spending increases the aggregate demand and household incomes (OECD economic outlook: general assessment of the macroeconomics situation 2014). Arguably, quantitative unemployment-easing strategies adopted by the US following the economic crisis were informed by this theoretical paradigm.

If the US government had been able to guarantee the continuity of the economy at the rate of about 3.25%, the maintenance of deficits worth half trillion dollars could be possible to achieve. Nevertheless, the government also needed to focus on reducing deficits by about $300 billion annually. Hence, government interventions to unemployment are compromising due to the possibility of experiencing unprecedented outcomes on their implementation, considering the dynamism of economic performance. Nevertheless, contemporary economies must ensure a balance of the interventions since unemployment is a challenge that they must overcome.

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Conclusion

Unemployment constitutes a major challenge that most contemporary economies around the globe have to fight with. It is mainly divided into frictional, structural, and cyclical joblessness. Overcoming the challenge requires contemporary economies to respond to the underlying causes depending on the prevailing circumstances. For example, unemployment that results from any economic downturn would require the consideration of supply-side policies coupled with other fiscal strategies. Nevertheless, it is also important to consider other interventions such as sound labour relations and/or easing legislations that limit the natural operations of employment supply and demand constraints. This strategy can help to reduce the individual and societal cost of unemployment.

Reference List

Fang, T & MacPhail, F 2007, ‘Transitions from temporary to permanent work in Canada: who makes the transition and why?’, Social Indicators Research, vol. 88, no.1, pp. 51–74.

Fedeli, S, Forte, F & Ricchi, O 2015, ‘The long term negative relationship between public deficit and structural unemployment: an empirical study of OECD countries (1980-2009)’, Atlantic Economic Journal, vol. 43, no. 1, pp. 39-54.

Furman, J 2016, ‘The truth about American unemployment’, Foreign Affairs, vol. 95, no. 4, pp. 127-138.

Goran, O 2014, ‘Balanced economic growth in history’, American Economic Review, vol. 49, no.2, pp. 338-351.

Iwaisako, T 2016, ‘Effects of patent protection on optimal corporate income and consumption taxes in an R&D-based growth model’, Southern Economic Journal, vol. 83, no. 2, pp. 590-608.

Kroft, K, Lange, F, Notowidigdo, M & Katz, L 2015, ‘Long-term unemployment and the great recession: the role of composition, duration dependence, and nonparticipation’, Journal of Labour Economics, vol. 34, no. 1, pp. 7-54.

Lahusen, C & Giugni, M 2016, Experiencing long-term unemployment in Europe: youth on the edge, Palgrave, London.

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Lee, H & Park, H 2015, ‘Indeterminate balanced growth under habit persistence and fiscal policies’, International Economic Journal, vol. 29, no. 2, pp. 259-284.

Łukasz, P 2014, ‘Review of theories and models of economic growth’, Comparative Economic Research, vol.17, no.1, pp. 45-60.

Marginson, P 2016, ‘Governing work and employment relations in an internationalised economy’, ILR Review, vol. 69, no. 5, pp. 1033-1055.

McVittie, C, McKinlay, A & Widdicombe, S 2015, ‘Passive and non-employment: age, employment and the identities of older non-working people’, Journal of Aging Studies, vol. 22, no. 3, pp. 248–255.

OECD economic outlook: general assessment of the macroeconomics situation 2014, Web.

Rothstein, J & Valletta, R 2014, Scraping by, income and programme participation after the loss of extended unemployment benefits, Web.

Sivy, M 2014, ‘What the current economic outlook mean for the American families’, Economy and Policy, vol. 2, no.1, pp. 51-63.

‘The Turkish economy’ 2013, The Economist, Web.

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StudyCorgi. (2020, December 16). Unemployment, Its Types and Government Intervention. Retrieved from https://studycorgi.com/unemployment-its-types-and-government-intervention/

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