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Unemployment is a residual and individual problem which effect on whole economy. By late the 1980s unemployment becomes a big policy and public consensus for the G5 countries (UK, USA, Japan, France and Germany). It continued argue that among the G5 countries the level of UK economy was "an economy of Unemployment" with all the human and economic waste and inefficiency such as an economy entails. In view of the rapid rise in unemployment that has occurred between 1990 and 1991. But recently the UK has lower unemployment rates than France and Germany. However a number of logical thought trying to explain the policy of unemployment rates and address the solution of Unemployment.
Unemployment defined as the numbers of people of working age who are able and available for work at current wage rates and who do not have a job. But the unemployment rates in the proportion of unemployed people in the economically active in labour force.
Unemployment Rates calculated by: number of unemployed/number of economical active X100.There is two basic ways government can measure the unemployment rates such as
The Claimant Count: means the number of people when claiming their unemployment benefit from government on any given period time.
Labour Force Surveys: by this survey government count number of employed including number of unemployed people.
According to Labour Force survey the graph shows that in 1990 unemployment rates fall at just over 6% where employment rates picked at just under 76%. Currently (source: IMF) UK unemployment rates more than 8% whereas Germany holds well above 10% unemployment rates.
Zero Unemployment Rates
It is true that the economy unemployment rate could not at zero if an economist full employment because there are two type of unemployment exist in our economy such as:
It occurs when consumer demand for the new product. For example when new technological progress has made skills blockage such as computer introduced white collar disappeared.
It occurs when for the particular skill demand for labour and supply for labour are not match or people are not aware for the job opportunity or geographical match of workers ongoing process.
Besides those reason unemployment could not zero for some institutional phenomenon such as:
Minimum wage law may make it too expensive to hire a extra labour
Government employment benefit reduce job interest
Government restriction on institution may reduce job arability.
Racism or gender discrimination may decrease interest of job. etc
However there are numbers of principal schools of thought in macroeconomics offered the cause of unemployment such as
Neo -Classical Thought
New classical Thought
New Keynesian Thought
The classical thought assumed that the economy would tend to full equilibrium if left its own. According classical theory, labour market operated demand of labour and supply of labour when balanced by price signals.
From the graph shown that there is unemployment exist when excess labour supply (N2) and demand of labour (N3). The classical school of thought explain that if excess labour supply existence in economy, wages would fall(W1 to W*) until the labour market clearing equilibrium is restore, alternatively when excess labour demand existence labour shortage would push up wages and restore the equilibrium(NFull).
Say's Law is justified the classical view and law said that: "supply creates its own demand". That means the economy is in a permanent state of full-employment equilibrium. Because says law guarantees any increase in output of goods and services will sold for sufficient demand and therefore firm will never reduce output or cut the jobs. However, if there is unemployment, market forces should quickly eliminate it and restore equilibrium.
But after 1929-33 great depression the whole world economy collapsed in industrial capitalism and the classical school of theory could not explain the established economic wisdom. This depression eventually gave to raise Keynesian thought.
Keynes his most famous work "The General Theory of Employment, Interest and Money (1936)" argued that could not settle at Equilibrium and it would not change the labour market situation because of aggregate demand. If aggregate demand fell, output and employment could fall and the economy could become trapped in a less than full-employment equilibrium.
The graph shows that when demand for labour fall (D1 to D2) the wage also fall (W to W1) and unemployment would formed (ab).
Nevertheless 1970's continuous unemployment and inflection failed the Keynesian's demand deficient unemployment and this argument considered as Keynesian's two analytical frame works such as the 45 degree model and the Philips curve which is known as a Neo- classical theory.
Neo Classical Thought
According the neo classical thought the 45 degree demonstrates the Keynesian aggregate demand .It means to using the appropriate fiscal policy if aggregate demand add and reduce the economy fall in inflection pressure. More precisely where output and employment are below their full employment level if government cut tax or higher government expenditure which is increases the aggregate demand. On the other hand where output and employment are at their full employment level if government increase tax or decrease government expenditure in this situation demand- pull inflationary pressures are exists. Therefore the aggregate demand management will maintain the economy at close to full employment equilibrium both unemployment and inflection need be a problem.
The graphs show that if aggregate demand fall a positive demand shock occurred at full employment equilibrium position (Ye) and meanwhile inflationary gap existed in economy.
Conversely the 45 degree aggregate demand says that the unemployment and inflection not appeared in same time. In the late 1950s Philips curve more purify the Keynesian thought. In 1958 Professor A.W.Philips illustrated a statistical relationship between unemployment and inflection
The Philips curve shows the inverse relationship between unemployment rates and inflection. It argued that if government wants to reduce unemployment it has to accept higher inflation as a trade off.
The graphs shows that if unemployment rates fall (1.5% to 1%) inflation rates up (2 to 4%)S
Although in 1970s the Philips curve was unable to explain the problem of unemployment and inflection which is going up together stagflation. In mean while time two economists Milton Friedman and Edwards Phelps appeared with monetarism theory that able to show concurrently inflection and unemployment based on "expectations - augmented" Philips curve.
Professor Friedman argued that there were a series of different Philips curve for each level of expected inflection. He persuaded that when government injects resources into the economy once again the unemployment fall in short-term but there would occurred high inflation. As a result people expected inflection to occur then they would anticipate and expected a correspondingly higher wage rise.
The graph revealed that unemployment below Un to U* the series of Philips curve (SRPC1) moved alone with inflation rates zero to 4% because the expectation has been changed and people adept new rates.
But Friedman failed to long term unemployment related with inflation rates which is elaborated by New Classical viewed.
New Classical Thought
Robert Locus who is one of the new classical economist argued that announced and unannounced fiscal and monetary policy are affected on out and employment because of natural rate of unemployment will alter the equilibrium and this thought actually expand the rational expectation.
The graph shows without short term reduction of unemployment (Un to U*) rational agent would anticipated an inflationary environment.
New Keynesian Thought
The new Keynesian thought wrecked the long run Philips curve which is breakdown by Friedman depends on NAIRU (Non Accelerating inflation rates of unemployment). In Behavioural theory George Akerlof argued at the low level of inflation permanent trade off between inflation and unemployment because low inflation not silent.
In the diagram shows when unemployment fall from U a silent inflation becomes higher.
Furthermore according New Keynesian point of view real wage rate could establish long unemployment equilibrium.
The diagram exposed that a higher market clearing efficiency wage paid consequent unemployment (N2-N1) whereas aggregated demand shock shifting the labour demand curve which is lead the unemployment ( N2 to N3).
Most Satisfactory Explanation on nature of European Unemployment
The classical thought believed that supply automatically creates full employment and efficient market economy drive the unemployment problem where a little need of government interference. But 1929-33 great depression pushed the European unemployment rates to unprecedented level and whole economy collapsed.
The table shows the percentage of unemployment rates of European countries during depression period. In 1930-38 USA enjoyed high Unemployed rates 26.1%
The depression eventually gave to raise the Cambridge economist John Maynard Keynes thought and he identified the root of the problem as a lack of aggregated demand. He explained that if aggregate demand fall the economy were hit by adverse shocks which create a fall the business confidence where Say's law would failed to hold as firms cut investment, output and employment and this process could leave the economy in less than full unemployment equilibrium. Moreover a less than full-employment output would find just enough demand for that output and the economy would be stuck in a slump.
Keynes suggested that government attempt stabilized the policy for settle the level of output and full employment. Despite the fact that until 1970s the Keynesian aggregate demand management dominated western policymaking the economy in of "overheating " and facing the inflationary pressured.
In1970's inflation rates increase 10% to more the 20%. The graph shows that after 1970 inflation rates in UK and Japan reached at well above 20% whereas USA and France more than 15% abut Germany enjoyed the less inflationary rates. In the mean while time G5 countries were suffered by high unemployment. From the following graphs we can see that in 1970s unemployment rates increased rapidly where full employment appear only 2.5% .
In 1970s economy are experienced by rising unemployment and inflation which made together stagflation where Keynesian policy failed to explain the new dilemma. On the other hand Keynesian appeared that most unemployment arise outside labour market but the great depression and early 1980s and 1990s recession Keynesian view unsuccessful to explain Frictional and Structural unemployment. Conversely Friedman view's clear the all of Keynesian's confusion which is based on expectations - augmented Philips curve". Because 1970's stagflation redundant the Philips curve. Whereas Friedman indentified that the cause of inflation is balanced by the natural rate of unemployment and this unemployment occurred inside labour market which should be in microeconomic nature, cause macroeconomic policy not affective in the long run. He also argued the stabilization policy which was driven the Post war boom means it ineffective to maintain the economics at potential GDP and full employments and it should be destabilized cause economic will stable inherently. Yet Monetarist assumption abandoned the1980s and 1990's recession and in monetarist view labour market are not flexible even though the lack of competitiveness has obsessed the real wage. After all in my point of view the Keynesian school thought likely approach than other school of thought though monetarist would favour to abandon the stagflation. But if we see the 1970s, 1980s and 1990s inflation and unemployment is high but overall GDP rate remarkable. In addition Keynesian view is applicable in recent recession. Recently viewed that the Europe countries aggregated demand fall and lower rates of growth people are less interest to consume which tend to increased unemployment hand .Besides the Keynesian thought not decline fiscal and monetary policy and Labour union power to determined the wage and right.
Recent Unemployment and Solution
In UK jobless jumped by 43,000 and unemployment reached at 8%. According to IMF survey global financial crisis impact on European output and employment and it increased the recent unemployment. In Germany, UK output falls in significantly which reduced the growth of employment. Moreover labour market flexibility, mainly the higher level of employment protection lean to reduced employment inflow and outflow and declines the labour reallocation. Further more rapid rise of structural unemployment, financial institutions collapse, cutting hours, early retirement tend to increased the Unemployment
On the contrary mix labour market policies and flexibilities at firm level gradually employment has adjusted in UK and Germany. It is true that "time accounts" smooth the Germany's employment whereas government subsides decreased the working time. But wage flexibility and government support help to surpass the UK unemployment.
As final point unemployment is a major problem in the world economy. It is very difficult to bring down equilibrium position if it is not stop to increase at the first place and in the long run unemployed not able to participate in labour market. Therefore, government should initiate the improving labour market by increasing work incentives, reforming the operation house market and trade union.