Understanding Unemployment and Its Economic Effects
Unemployment is one of the most important factors in determining the country’s economy. Governments have to make sure that the number related to unemployment is on its smallest. The unemployment rate is not to show that the government can provide and maintain a job for its citizens as it is also a way of showing investors that they can enjoy economic growth along with the country.
But dealing with unemployment is far more challenging as this is not just about creating jobs for the citizens. A government has to consider different factors that will affect unemployment. For example, a government has to learn how to deal with investors so that they will stay in the country even though the unemployment rate is high.
Defining Unemployment
The common idea of unemployment is that it’s a state of a person who does not have a job. But by this definition even the minors could be called unemployed simply because they do not have job. Extending this definition to those who tried to look a job is also insufficient. For example, a person who tried to look for a job for a week but stopped doing so can be called unemployed. However, by the mere fact that they are no longer interested in finding a means they cannot be called unemployed because they are no longer interested in working.
For this reason, the best definition on unemployment is from ILO (International Labour Organization). Their definition is quite simple – an unemployed person is someone who does not have a job but have tried to gain employment for the past four weeks. By this definition, the exact number of those who are unemployed can be determined and the country’s national unemployment rate could be calculated.
Causes of Unemployment
There are three popular schools of thought that try to explain the cause of unemployment:
- Austrian Theory – in Austrian economics, job loss or unemployment is caused by the “invisible hand” which is basically an unseen mechanism that affects every industry in the country. Job loss could be caused because of the market’s openness to different ventures as the Austrian economics follows free market development. This means everyone could look for innovations to develop their business but this could mean job losses as many investors look for ways to cut costs including labor.
- Keynesian Theory – Keynesian economics believe that unemployment is part of a cycle in a country’s economic development. Increase in unemployment occurs when a company enters the stage of recession or economic downturn. This can be considered a free market development only with a business cycle. They point out that supply shocks could be the main cause of unemployment. Sharp increase in supply can affect a business as this would lessen demand and earnings would diminish. But Keynesian’s have a sharp contrast with Austrian economics with regards to business development on unemployment. By determining an existence of a business cycle, the government can create laws and provisions to limit unemployment. The economic theory also supports government intervention on preventing unemployment or even recession.
- Marxism – under this theory, capitalism is the main culprit for unemployment. It also sees unemployment caused by business development but it provides a negative tone as progress means reducing to cut costs while improving productivity. Part of this process is to reduce labor costs which mean people should be terminated. Marxism does not push for any form of intervention to limit unemployment. They are pushing for complete demolition of capitalism which is the cause of unemployment. Marxism believes that only through socialism that unemployment and other social problems could be addressed.
Effects of Unemployment
Unemployment will naturally cause financial problems to the affected individual. Without a source of income, their ability to provide assistance to their family is very limited. This could further develop to personal problems within the family as anxiety over the lack of income could affect everyone. Even with government intervention through unemployment benefits, the family will still be affected when the members of the family are out of work. Personal conveniences will be affected as government assistance is very limited.
Political and social settings are also affected by unemployment. Unrest and protests increases as people start to complain about the lack of assistance to maintain the trend of job creation for everyone. Some will even look for reasons outside the government for the cause of unemployment. Some could even point to immigration or foreign trade as the cause of unemployment.
It’s also possible that citizens will resort to criminal behavior because of unemployment. As the source of income dwindles, people have to look for ways to earn for their family. Since there are no jobs available, the only course of action is to consider illegal activities to earn. This is the reason why criminal rate is high on places with high unemployment rate.
Preventing Unemployment
There are two schools of thought when it comes to preventing and limiting unemployment. The first solution is to increase demand of products and services. The government can stimulate the economy through creating government-assisted employment or even increase in financial assistance so that citizens will go out and buy or seek the services they want. Another solution is to focus on adjustment or supply of employment. This means removal of minimum wage laws and CBA (Collective Bargaining Agreement) so that businesses can adjust their losses and slowly push the business to development.