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Business & Unemployment

Unemployment

There are various types of unemployment:

1		Frictional unemployment — when people change jobs they may be unemployed for a while between jobs.
2		Seasonal — there is generally more work available during summer months than during winter months.
3		Cyclical or demand deficient unemployment — according the economist Keynes there is the possibility that there is insufficient demand for goods in the economy as a whole, which leads to unemployment. It is generally accepted that there was a lack of demand during the great depression of the 1930s.
4		Structural unemployment. Each economy has a “structure”. This structure comprises the nature of the economy, which industries are key to the production of wealth, exports and so forth. From time to time the structure of the economy changes. When this happens, people may be employed in industries the products of which are no longer in demand. There will follow unemployment in these industries. Labour (and capital) involved in these industries needs to transfer to other new industries or services. However, this cannot happen “overnight”. It takes time, for example, to train miners to become bank-clerks. In fact, it may take generations. In the meantime, while labour retrains, there is structural unemployment.
5		Residual unemployment. This describes the unemployment that arises when people are unwilling to work or unable to work owing to a disability.

Effects of unemployment

When unemployment is high, this is coupled to a recession, so firms face less demand in general for their goods and services. On the other hand, the firm may have more choices when it comes to recruiting labour, and the work-force may be more cooperative, since workers are more worried about the security of their jobs.

Unemployment is a particular evil for those who are unemployed, and all governments seek to reduce unemployment wherever possible.

Solutions to Unemployment

We currently live in a monetarist era of economic policy. What this means is that governments place controlling inflation above reducing unemployment among their objectives.

This is not because governments are unconcerned about unemployment, but because they have decided, in their wisdom, that controlling inflation is the key to controlling unemployment.

The reason for this is because the economies of the world are now all linked through trade and in many other ways. Inflation erodes international competitiveness. When international competitiveness declines, there is a decline in exports, leading to a recession.

In other words, inflation is invariably followed later by a recession, and the greater the inflation, the worse the recession.

Thus, inflation causes a recession, and a recession causes unemployment.

Until the 1980s Britain employed an alternative theory of economic management — the Keynsian theory of demand management. This maintained that it was a good idea for governments to increase their expenditure during a recession, and thus, reflate the economy.

This might have worked during the period of the Great Depression of the 1930s, but not in the 1980s. For example, the reason is that Britain's unemployment problem of the 1980s was not really a problem of demand deficient unemployment, but more related to structural problems in the economy — arguably, over-strong union power, and old industries is structural decline. Hence, reflating the economy did not work.