Unemployment rate Essay Example for Free

Unemployment rate Essay Unemployment rate is defined as the percentage of persons looking for a job but did not secure work for the last month (3 weeks) within the labor force. In other words Unemployment rate can be referred to as the ratio of the labor force that is not engaged in employment. The person considered to be unemployed must have the requirements for the employment like be of sound heath and searching and willing to work. There are different forms of unemployment that can occur in an economy include. Cyclical unemployment results from the business cycles of economy of boom, recession, depression and recovery. During recessional times there is reduced demand for goods and services by consumers. Seasonal unemployment usually occurs in economies activities that are seasonal in nature especially agriculture like planting and harvesting season. Structural employment occurs when employees do not have the skills to match job requirements. The workers who possess the required skills may be far from the potential employing firm. Unemployment reflects unutilized resources in the economy. The total labor force indicate all the numbers of able person in the activity involved in work and that are unemployed and looking for work in the last three weeks. The labor supply is the number of individual who are willing to supply their efforts at work given the prevailing wages in the labour markets. Even at full employment level of the resources in the economy that is land, capital and labor there is a natural rate of unemployment. The potential GDP level is said to be experienced when labor is efficiently engage the resources in the production process. Usually the form of unemployment at the potential GDP is the frictional unemployment which occurs in the switching from one job to another. This is the most unavoidable form of unemployment (Stiglitz, 1985) According to Keynes inflationary pressures in an economy results as people demand hire wages (price of labor input) to enable them meet the higher cost of living. The unemployment in the economy can be understood by examining the interaction of aggregate demand (AD) and aggregate supply (AS) curves which is explained by the Keynesian economics. The aggregate demand of labour is the number of workers firms want to hire in the production process given their production technique and the market price of labour in form of wages. The Keynesian theory argues that prices and wages to sticky that the do not vary fast in the short term labor that is a duration of 3 months to 1 year that is nominal wages being the price of labor do not simultaneously respond to the quantity of labour resource supplied in the market.. However in long term beyond one year prices of resources (capital and wages for labor do change) which explains the vertical supply curve of labor. In the short term classical economists argue that since prices and wages are sticky as reflected by a horizontal aggregate supply curve (AS) The Keynesian framework provides an explanation on spending in the economy which forms the aggregate demand (AD). Monetary policy affects output and employment by through the shifting of aggregate demand curve. The AD shows the total resources for a country GDP; include in the AD are consumption (both private and public) investments to replace worn out capital and inventory ,government expenditure and the net export position of a country. The total spending curve is inversely related for price and quantity of output in the market. The spending in the economy by private consumers and public sector elicits demand for labor which human effort to produce goods and services by industries (Stiglitz, 1985). The rate of unemployment can be reduced by stimulating the economy by offering incentives to investors. The availability of cheaper sources of capital offers an avenue for economic growth. Any stimulus package by the states in the economy aims to encourage employment of resources which include labour through the private sector. The increment on private person’s disposable income and low rates of interest are conducive for businesses. A major issue at macroeconomics level is the rates of inflation and unemployment. The aggregate supply curve (AS) and AD help to analyze the equilibrium prices and quality in the economy. This analysis is said to be concluded at comparative statistics ie others factors constant and not variables are changing over time. The Phillips curve captures the inverse relationship between unemployment and inflation level. The government is forced lower interest rates on borrowed funds by investors on the face of inflationary pressures in the economy to stimulate consumer and investor borrowing and later spending to facilitate economic recovery and growth . Failure to intervene may result in a recession. Inflation reacts to curtail spending and leads to jobless as firms cannot hire workers without a market for goods. Phillips curve states that lower rates of unemployment can only be achieved at higher prices for goods in the market. The classical economists led by John S Mill. David Ricardo; Thomas Malthus and Adam Smith advocates for free enterprise and freedom in the market that is lack of state intervention in the economic activities. In the US, the bureau of labor keeps the statistics figures on unemployment (Kimberly . A 2008) for its commodities . The business cycles experienced by an economy are a result of variations in the aggregate demand (AD) not the capacity of the economy given by the resource pool of a nation (land, labor, capital and entrepreneurial capacity). The reduction in the demand of a good that uses labor leads to unemployment in the economy. Bottlenecks experienced by many US firms like the current credit crunch results in unutilized capacity in production and unemployment. Firms use labor input up to the point whereby the marginal cost of labor equals marginal revenue for the commodity being produced. In perfect markets for labor there is perfect information on available work opportunities. In reality however information asymmetry hinders communication between work seekers and employing firms. According to Adam Smith the market can promote efficiency and ensure equal prices with perfect information on the market. Efficiency means full utilization of available capacity with minimal wastages. According to George Stigler in the article Information the search for highest reward (prices) with minimal cost is usually difficult. Information seeking process involves costs. (Stiglitz 1962) According to Arthur Okun an economist in 1962 the level of unemployment in economy is used to explain the growth in a country’s gross national product (GNP). Decline in level of unemployment tend to be correlated with a rise in a country GNP. This shows an improvement in economic well being of a nation is all sectors factored in the national accounts.Using World War II (1948) period accounts Okun found out that 3. 2% increase in GNP was accompanied by a percentage unit decline in unemployment. (Howland F et al 1980) References Romer C. D (2004) Business Cycles. Liberty Library Economics Article. http://www. econlib. org/library/Enc/BusinessCycles. html Stiglitz J E (1985) Information and Economic Analysis: A Perspective Economic Journal 95, supplement: Conference Papers: 21–41. Howland F and Barrelo H (1980). There are Two Okun’s Law Relationship Between Output and Unemployment. Wabash College article