Friday, October 25, 2013

The Issue of Unemployment - Part 1

In order to explain  clearly the concept of unemployment, it may first be necessary to define what full employment is.  Baddock  (1992) defined  full employment as a situation  in the economic sphere wherein “everyone in the labor force who is willing to work at the market rate for his type of job, has a job”. With the definition, Baddock emphasized the exception of those who are “switching from one job to another”.

 The above definition conveys the concept of “willingness to work”. That means, a person, as a member of  the labor force, must have the intent to find a job.  This separates those people who intend to be in the receiving end of welfare services of the government. The economic sphere that Baddock pertain to therefore does not  include abnormal economic behavior such as apathy towards being productive. In short, the economic sphere pertained to is market- oriented. The  definition likewise stresses that the market rate is the defining factor for the level of wages, which again, emphasizes a market orientation.

 Moreover, the definition  clarified that functional unemployment, a situation which occurs when people switch jobs, is not considered  as unemployment at all  because it is a temporary condition.

 At the macroeconomic level, employment is considered a major indicator of economic development and stability (Samuelson, 1982).  In fact, as macroeconomics is the study of economic systems aggregating over the functioning of individual economic units, it is primarily concerned with determination  of national income, prices and employment levels. Moreover , it is concerned with the roles of fiscal and monetary policies (Baddock, 1992).

The Gross National Product (GNP) is an aggregate indicator of development and included in its computation are all payments for the use of factors of production, including wages and salaries of labor (Samuelson, 1982).  In effect, a high level of employment can be directly translated to a high level of national income and high GNP.

It has been argued through time and again  that GNP may indicate economic growth but not growth with equity and thus it may not be a satisfactory indicator of development.  However, if the  increase in GNP  is attributable to the increase in employment rather other factors,  it actually can be interpreted as more people  benefiting from the growth. In effect, if high employment is the main factor which triggered the increase in GNP, then the trickle-down effect of growth to the masses is much more  observable. That is because, in reality, a high level of employment (or a low unemployment level), means that more people will have more buying power which can be translated (consistent with  the classical view)  as an increase in the propensity to consume and save, Further, it means a higher  demand for products in the market and greater capacity to invest.  As a reaction, the market will tend to expand production and hire more people. The chain of effects goes on in a cyclical fashion and the economy grows with it.

Economists  contend that if the rate of economic growth/expansion would  approximate the rate of growth of the population, then employment would be sustained, ceteris paribus.

The aim of this academic exercise is to critically review and analyze the opposing arguments and ideas held by Keynesian and classical economists as regards (un)employment and relate them with the subject argument in a very realistic light.

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