Post on 03-Jun-2018
transcript
8/12/2019 Macroeconomics Individual Assignment
1/16
1
CONTENTS
I. Introduction.2
II. Theoretical Background..8
III. Empirical Evidence......................................................................10
IV. Critical Issues12
V. Conclusion. 15
VI. Reference .......16
8/12/2019 Macroeconomics Individual Assignment
2/16
2
Introduction
Unemployment
Unemployment (or joblessness) occurs when people are without work and
actively seeking work. The unemployment rate is a measure of the prevalence of
unemployment and it is calculated as a percentage by dividing the number of
unemployed individuals by all individuals currently in the labor force. During periods of
recession, an economy usually experiences a relatively high unemployment rate.
According to International Labor Organization report, more than 197 million people
globally are out of work or 6% of the world's workforces were without a job in 2012.
There remains considerable theoretical debate regarding the causes,
consequences and solutions for unemployment. Classical economics, new classical
economics, and the Austrian School of economics argue that market mechanisms are
reliable means of resolving unemployment. These theories argue against interventions
imposed on the labor market from the outside, such as unionization, bureaucratic work
rules, minimum wage laws, taxes, and other regulations that they claim discourage the
hiring of workers.
Keynesian economics emphasizes the cyclical nature of unemployment and
recommends government interventions in the economy that it claims will reduce
unemployment during recessions. This theory focuses on recurrent shocks that
suddenly reduce aggregate demand for goods and services and thus reduce demand
for workers. Keynesian models recommend government interventions designed to
increase demand for workers; these can include financial stimuli, publicly funded job
creation, and expansionist monetary policies. Keynes believed that the root cause of
unemployment is the desire of investors to receive more money rather than produce
more products, which is not possible without public bodies producing new money.
The employment opportunities of all citizens of a country are impractical due to
several reasons. Unemployment of some kind has always been a countrys problem of
modern societies, whether developed or underdeveloped
8/12/2019 Macroeconomics Individual Assignment
3/16
3
Types of unemployment
1. Voluntary unemployment
These are the people who are unwilling to work at the prevailing wage rates and there
are some who are lucky enough to get a continuous flow of unearned income from their
unemployment status.
2. Frictional unemployment
When some workers are temporarily out of work while changing jobs it is called frictional
unemployment, to an extent it is also caused if there is a mismatch between job and the
workers. Such a mismatch can be related to skills, payment, work time, location,
attitude, taste.
3. Casual unemployment
In industries such as building construction, catering or agriculture, where workers
are employed on casual basis, there are chances of casual unemployment occurring
due to short term contracts, which are terminable at any time.
4. Seasonal unemployment
Some nature of job exists for only some time. Work in sugar mills lasts for about six
months. Rice mills work only for a few weeks; they offer employment for only a certain
period in a year.
5. Structural unemployment
Due to a structural change in the economy structural unemployment may take place or
an absence of demand for the workers that are available. Structural unemployment is
also due to technological change.
8/12/2019 Macroeconomics Individual Assignment
4/16
4
6. Technological unemployment
Advanced countries with capitalistic economy are subject to subject to trade cycles.
Trade cycles-especially recessionary phasescause cylinder unemployment in these
countries. During the contraction phase of trade cycle in a economy, aggregate demand
falls and leads to disinvestment, decline in production and unemployment
7. Cyclical unemployment
During the contraction phase of a trade cycle in an economy, aggregate demand falls
and this leads to disinvestments, decline in production and unemployment.
8. Chronic unemployment
It is when the unemployment tends to be a long term feature of a country.
Underdeveloped countries suffer from chronic unemployment on account of the vicious
circle of poverty.
9. Disguised unemployment
It refers to a situation of employment with surplus manpower, in which some workers
have zero marginal productivity so that their removal will not affect the volume of total
output.
8/12/2019 Macroeconomics Individual Assignment
5/16
5
Specific causes of unemployment
1. In-sufficient rate of development.
Even though employment on the whole is increasing, the resent unemployment has
increased. This is so as a result of insufficient rate of expansion and not the actual
decline of employment opportunities as a whole.
2. Rapid rate of population growth.
The rapid rate of population growth in the early fifties has been another cause of
increasing unemployment in the country.
3. Increasing output of the Indian universities.
The galloping rate at which mass production of matriculates, under-graduates is going
on the Indian universities is another cause of the increasing gap b/w employment
opportunities
4. Backward character of Indian agriculture.
In regard to the colossal rural unemployment and under-employment, the very heavy
pressure of population on land and the backward nature of our farming cannot provide
employment opportunities for the far-too-numerous rural populace.
8/12/2019 Macroeconomics Individual Assignment
6/16
6
Relationship between GDP and Unemployment Rates
The relationship between Gross Domestic Product (GDP) and unemployment
rates can be seen by the application of Okuns Law. According to the principles
established by this law, there is a corresponding two percent increase in employment
for every established one percent increase in GDP. The reasoning behind this law is
quite simple. It states that GDP levels are driven by the principles of demand and
supply, and as such, an increase in demand leads to an increase in GDP. Such an
increase in demand must be accompanied by a corresponding increase in productivity
and employment to keep up with the demand.
GDP and unemployment rates are linked in the sense that both are
macroeconomic factors that are used to gauge the state of an economy. A rise in the
GDP is significant in the study of macroeconomic trends in a nation. This is also true of
a rise or decrease in unemployment levels. GDP and unemployment rates usually go
together because a decrease in the GDP is reflected in a decrease in the rate of
employment.
When a recession occurs, the total amount produced, or GDP, decreases. We
know from the study of economic growth that, to produce goods and services, inputs
such as labor and capital are needed. The decrease in production means that some of
the inputs to production will not be used in production. In general, these idle resources
are referred to as unemployed. The type of unemployment most often discussed is the
unemployed labor during a recession.
Such a relationship between GDP and unemployment rates is important in two
ways. A rise in unemployment levels is the natural result of increased GDP levelscaused by an increase in consumer demand for goods and services. Such a rise in both
GDP and employment levels is an indication that the economy is booming. During such
periods, consumer confidence is high and the demand for various goods and services
are correspondingly elevated. In order to meet this surge in demand, manufactures and
other types of companies hire more employees.
8/12/2019 Macroeconomics Individual Assignment
7/16
7
For example, U.S. employers shed 63,000 jobs in February 2008, the most in five
years. On Oct. 1, the Bureau of Economic Analysis reported that an additional 156,000
jobs had been lost in September. In November 2008, employers eliminated 533,000
jobs, the largest single month loss in 34 years. For 2008, an estimated 2.6 million U.S.
jobs were eliminated. The unemployment rate in the U.S. grew to 8.5% in March 2009,
and 5.1 million jobs had been lost since the recession began in December 2007. The
full impact of a recession on employment may not be felt for several quarters. After
recessions in Britain in the 1980's and 1990's, it took five years for unemployment to fall
back to its original levels. Many companies often expect employment discrimination
claims to rise during a recession.
The opposite is true in the case of a deflation, which also shows the relationship
between GDP and unemployment rates. When there is a dip in the GDP caused by a
decrease in consumer confidence and a corresponding reduction in demand,
companies must adjust to this low demand. Part of the adjustment process includes the
shedding of workers who may have become redundant in the face of sluggish demand
by consumers.
At times like this, companies look for ways of conserving money since they are
no longer making as much money as they used too. One of the cost-cutting measures
includes mass sacking of employees whose salaries the companies can no longer
sustain. Signs like this are indicators to economists that the demands for goods and
services have dropped and that the GDP level is also on a downward slope.
Note that even in favorable economic times, the unemployment rate is never
zero. The "natural rate of unemployment," or the average rate of unemployment around
which the economy fluctuates, is not zero. The natural rate is determined by a number
of factors, but in the most basic sense, there is natural turnover in the labor force at alltimes. During a recession, however, the actual unemployment rate rises above the
natural rate.
8/12/2019 Macroeconomics Individual Assignment
8/16
8
Theoretical Relationship between GDP and Unemployment Rates
Okuns Law
In its most basic form, Okun's law investigates the statistical relationship between
a country's unemployment rate and the growth rate of its economy. The economics
research arm of the Federal Reserve Bank of St. Louis explains that Okun's law "is
intended to tell us how much of a country's gross domestic product (GDP) may be lost
when the unemployment rate is above its natural rate." It goes on to explain that "the
logic behind Okun's law is simple. Output depends on the amount of labor used in the
production process, so there is a positive relationship between output and employment.
Total employment equals the labor force minus the unemployed, so there is a negative
relationship between output and unemployment (conditional on the labor force)."
Yale professor and economist, Arthur Okun, was born in November 1928 and
passed away in March 1980 at the relatively young age of 51. He first published his
findings on the subject in the early 1960s, which have since come to be known as his
"law." Okun's Law is, in essence, a rule of thumb to explain and analyze the relationship
between jobs and growth. A talk from Federal Reserve Chairman, Ben Bernanke,
perhaps most succinctly summarizes Okun's law basic concepts:
"That rule of thumb describes the observed relationship between changes in the
unemployment rate and the growth rate of real gross domestic product (GDP). Okun
noted that, because of ongoing increases in the size of the labor force and in the level of
productivity, real GDP growth close to the rate of growth of its potential is normally
required, just to hold the unemployment rate steady. To reduce the unemployment rate,
therefore, the economy must grow at a pace above its potential.
More specifically, according to [the] currently accepted versions of Okun's law, toachieve a 1 percentage point decline in the unemployment rate in the course of a year,
real GDP must grow approximately 2 percentage points faster than the rate of growth of
potential GDP over that period. So, for illustration, if the potential rate of GDP growth is
2%, Okun's law says that GDP must grow at about a 4% rate for one year to achieve a
1 percentage point reduction in the rate of unemployment."
8/12/2019 Macroeconomics Individual Assignment
9/16
9
It is most important to note that Okun's law is a statistical relationship that relies
on a regression of unemployment and economic growth. As such, running the
regression can result in differing coefficients that are used to solve for the change in
unemployment, based on how the economy grew. It all depends on the time periods
used and inputs, which are historical GDP and employment data. Below is an example
of an Okun's law regression:
The law has indeed "evolved," or changed over time to fit the current economic
climate and employment trends at the time. One version of Okun's law has stated very
simply that when unemployment falls by 1%, GNP rises by 3%. Another version ofOkun's Law focuses on a relationship between unemployment and GDP, whereby a
percentage increase in unemployment causes a 2% fall in GDP.
8/12/2019 Macroeconomics Individual Assignment
10/16
10
Empirical evidence between GDP and Unemployment Rates
The correlation between unemployment and growth is ambiguous. Bean and
Pissarides (1993) examine the correlation between unemployment and (labor and total
factor) productivity growth for OECD countries over the period 1955-1985. The authorsfind weak evidence of a negative relationship between the two over the full sample, but
no clear relationship within sub-periods. Caballero (1993) uses quarterly time series
data from 1966:1 to 1989:4 for the U.S. and U.K., to find that the correlation between
unemployment and per capita growth is unclear: at medium frequencies, it is positive for
both countries; while at very low frequencies, it is positive for the U.K. and zero or even
negative for the U.S. Results using labor productivity instead of per capita growth are
similar. Bruninger and Pannenberg (2002) show that an increase in unemployment is
associated with a decline in productivity growth in Europe and the U.S. during the period
1960-1997. Dell'Anno and Solomon (2008) find a negative correlation in the U.S.
between quarterly changes in the unemployment rate and the quarterly growth rate of
GDP between 1970 and 2004.
Most empirical research shows that productivity growth has a negative impact on
unemployment. Based on a panel of 20 OECD countries spanning 1960-1996,
Blanchard and Wolfers (2000) find that TFP growth has a negative effect on
unemployment. Fitoussi et al. (2000) use data for 19 OECD countries over the period
1960-1998 to find that the Hodrick-Prescott-smoothed rate of change of labor
productivity has a negative effect on unemployment. Using individual data in the U.K.
spanning the period 1982-1999, Zagler (2006) finds that individual value added growth,
measured by the GDP growth rate of the region and the sector in which the individual
resides, has a negative impact on the individual unemployment rate, which captures the
number of days a person spends being unemployed over the entire year.
Using a panel of 15 industrialized countries covering the period 1965-1995,
Pissarides and Vallanti (2007) find that TFP growth has a substantial negative impact
on steady state unemployment, both in terms of the estimated elasticity and in terms of
the contribution of TFP growth to the explanation of the change in the unemployment
rate. Using historical time series for the U.K. from 1871 to 1999, Hatton (2007) finds that
8/12/2019 Macroeconomics Individual Assignment
11/16
11
faster productivity growth reduces the non-accelerating inflation rate of unemployment
(NAIRU) over the long run.
However, some studies find that the impact of growth on unemployment depends on the
type of analysis being performed. Tripier (2006) describes the empirical co-movementsof unemployment and labor productivity growth by means of spectral analysis over
1948-2000 for the U.S. The author finds that the co-movements are positive over the
business cycle, but negative in the short and long run. Using a panel of 20 OECD
countries spanning 1974 to 1989, Aghion and Howitt (1992) report an inverted-U impact
of GDP growth on unemployment. The results imply that countries with too fast or too
slow growth rates have relatively lower unemployment rates, while countries with
intermediate growth rates suffer the highest unemployment rates.
8/12/2019 Macroeconomics Individual Assignment
12/16
12
Critical issues
Causes of Unemployment in the Arab Countries: High unemployment rates in the
Arab societies can be attributed to economic, social and political reasons. In addition, it
can also be attributed to internal or external causes. The most important causes ofunemployment in the Arab countries would be summarized in the high population
growth rate, increasing from 218.239 million inhabitants in 1990 to 326.112 million
people in 2007. In addition, the most prominent manifestation of the failure in economic
development plans is the reliance on foreign loans (for non-oil producing countries) and
the lack of systematically economic planning in which there is no match between the
educational programs in most Arab countries and the application of policies aiming to
open economy in addition to the shift towards privatization programs that have led to
abandon large numbers of employees in private and public sector enterprises. Besides,
the unsuitable distribution of local resources is considered another important reason of
unemployment in Arab world.
The Relativity Impact of Economic Growth on Unemployment Rates: The
difference in the nature of the growth achieved and its impact on unemployment is what
makes economic policies in developing countries fail to reduce unemployment rates
although growth rates were fairly high. The economic growth is regarded as a
quantitative change occurring in two directions: one associated with an increased labor
productivity,which usually does not lead to the creation of additionaljobs and the other
direction is linked to an increase ofjobs, which reduce the unemployment rate according
tothe nature of the growth achieved. In fact, growth whichis associated with increased
productivity cannot lower the high unemployment rates.
Analysis of Unemployment in the Arab Countries: What distinguish the economics
of Arab countries are
unusually high rates of unemployment against the
internationalstandards. Arab Labor Organization states that current situation of unemployment in
Arabiccountries is the most dangerous in the world. It indicatesalso tbillion to raise
their economic growth rate from 3% to 7% that the Arab economies must invest about $
70and create five million jobs, to reduce unemployment rates and to make them within
the acceptable rates (Figure 1).
8/12/2019 Macroeconomics Individual Assignment
13/16
13
World Appl. Sci. J., 18 (5): 673-680, 2012
Fig. 1: The needed percentages to reduce unemployment rates.
Fig. 2: The needed growth percentages to reduce unemployment rates.
8/12/2019 Macroeconomics Individual Assignment
14/16
14
The Relationship between Growth and Unemployment: It is noticeable that a
significant correlation existsbetween growth and changing rates of unemployment.High
rates of growth indicate the market need foradditional labor to be employed from the
surplus of the labor force. On the other hand, financial recession increases rates of
unemployment due to job loss.It has to be highlighted that there is a weak relationship
between the growth rates and unemployment rates; ifeconomic growth gets increased
by, for example, 2.0 %, itdoes not mean that the unemployment rate gets decreased by
2.0%. It is found that the same rates of economicgrowth do not have the same impact
on unemployment inall countries.
The Relationship between Growth and Unemployment, aCase of Jordan: As for
the relationship between growth and unemployment in Jordan, like some Arab countries
it suffers from the abnormal rise in the unemployment rate, consequently affecting
development and openness in the Jordanian economy. Analyzing growth rates and
unemployment for Jordan shows the direction of the high growth rate and relative
decline in the unemployment rate in the period (2006 - 2011).
8/12/2019 Macroeconomics Individual Assignment
15/16
15
Conclusion
The correlation between real GDP growth and unemployment is very important for
policy makers in order to obtain a sustainable rise in living standards. If GDP growth
rate is below its natural rate it is indicated to promote employment because this rise intotal income will note generate inflationary pressures. In contrast, if the GDP growth is
above its natural level, policy makers will decide not to intensively promote the creation
of new jobs in order to obtain a sustainable growth rate which will not generate inflation.
The slope of unemployment in Okuns law in around -0.5 and potential GDP growth is
around 5.7 percentage points and the variables are negatively correlated as predicted
by the theory. These values are particularly important for policy makers in order to
obtain an optimal relation between unemployment and real GDP growth. In the previous
years, economic growth was above potential which has generated inflationary
pressures.
8/12/2019 Macroeconomics Individual Assignment
16/16
16
Reference
1. en.wikipedia.org/wiki/Unemployment
2. http://www.econport.org/content/handbook/Unemployment
http://www.investopedia.com/articles/economics/12/okuns-law.asp3. en.wikipedia.org/wiki/Okun's_law
4. www.jstor.orgstable
5. idosi.orgwasjwasj.pdf
6. thescipub.compdf.jssp...
7. http://www.econbiz.de/Record/economic-growth-and-unemployment-in-arab-countries-
is-okun-s-law-valid-moosa-imad/10003738465
http://www.investopedia.com/articles/economics/12/okuns-law.asphttp://www.econbiz.de/Record/economic-growth-and-unemployment-in-arab-countries-is-okun-s-law-valid-moosa-imad/10003738465http://www.econbiz.de/Record/economic-growth-and-unemployment-in-arab-countries-is-okun-s-law-valid-moosa-imad/10003738465http://www.econbiz.de/Record/economic-growth-and-unemployment-in-arab-countries-is-okun-s-law-valid-moosa-imad/10003738465http://www.econbiz.de/Record/economic-growth-and-unemployment-in-arab-countries-is-okun-s-law-valid-moosa-imad/10003738465http://www.investopedia.com/articles/economics/12/okuns-law.asp