Wednesday, October 30, 2013

The Issue of Unemployment - Part 5 (Shall We All Abandon Keynes Now?)

Classical economics/monetarism is a  market-oriented point of view. It revolves around the assumption that macroeconomic growth will trickle down  to the masses via the market mechanism.  However, market economies are, of course, imperfect  and the trickle-down effect does not normally occur.  This means that equity issues are unlikely to be resolved under the classical/monetarist approach unless the market is near, if not fully, perfect.

On the other hand, direct employment of people is already a wealth (re)allocation measure which effects and ensures socio-economic equity, and this is something that can not be guaranteed in monetarism. 

Going back to GNP, the increase in that economic indicator  may  not necessarily mean that all or majority of the people  benefited from the growth of the economy. It is possible that,  under a monetarist system, rich will get richer and the poor, poorer and the income disparity between economic classes will continue to widen.

In addition to the above, it should be worth noting that when the shift towards monetarism was made by the above-cited governments, they ignored the structural problems which rendered Keynesian economics ineffective. For instance,  Australia, as a welfare state, provide welfare benefits to the unemployed which may cause apathy for people to get jobs.  The expectation that they will somehow still have a source of income make people indifferent towards earning their own money. The teenagers may even have the same notion such that more and more may probably be dropping out of school. According to the definition of  (un)employment by Baddock (1992) as presented earlier, this type of unemployment may not be included in the statistics because  the element of willingness to work is not present and therefore, must not be taken against Keynesian economics.

Another structural problem that should  have been contended with is the immobility of jobs and people. It is possible that there are oversupply of goods and labor in one area or region but a corresponding undersupply may   exist in other areas.  The immobility of people to seek jobs where there are available may be caused by transport disadvantages, rigidity of wages and hiring  systems and  erroneous land-use decisions.  This is where the role of planners may actually come in.

As cited by Kalachek (1973, in Rasmussen and Haworth, 1973), there were central cities in the United States in the mid-60s which experienced massive unemployment rates even though at that time, the overall demand for labor  was strong and hiring standards were consequently relaxed. “ Inferior quality of education, poor health, low motivation and racial discrimination (applicable to unemployed blacks) are traditional explanations” (Kalachek, 1973). However, an additional idea was advanced suggesting that the physical location of jobs and workers and the existing transportation network within labor markets may also play a culprit role. Kalachek (1973) further explained that this problem  was and is the result of the suburbanization of industries, primary reliance on privately-owned vehicles, and residential segregation. To this list, lack of information about job availability  and lack of  social support services  e.g. housing may  be added.

The cause of suburbanization are, among others, retail trade following customers outside the inner cities, technologies allowing manufacturers to operated in a more cost-effective manner in the fringes (Hall, 1991), and other reasons  which may be related to  deagglomeration  forces (McConnell, 1988).

Suburbanization itself, which created the  cross-commuting patterns of residents and workers, is not an impediment to employment. It is the mobility of the labor force that may inhibit them to be employed where job is available.

Note also that the whole problem of structural unemployment may actually be looked at in the regional development angle because the structural problems as mentioned by Kalachek (1973)  are the same employment-related problems which may impede regional development (BIE, 1994):

            “ In relation to market-based impediments,...the labor market adjustments may be  impaired  by a) lack of  information about employment and accommodation prospects in    different locations; and b) inadequate opportunities for training and retraining. “

Relatedly, the BIE (1994) further cited the Australian Industry commission’s 1993 Report which identified a large number of institutional and government-related impediments to regional adjustments, to cite, verbatim,  Australia’s existing wage fixing arrangements limit the scope for wage flexibility which constraints adjustment options available to regions with consequent adverse effects on employment opportunities; Greater flexibility in wages (enabling firms to pay “training wages”) and work practices would provide greater potential for training and retraining by employers. This would help increase the regional employment opportunities;  Social security arrangements in conjunction with the tax system are exacerbating problems of regional unemployment. Consideration needs to be given to policy options which deals with poverty traps and the employment disincentive effects of social security payments, particularly for those facing low wage alternatives; Current arrangements relating to superannuation guarantee charge for causal and itinerant employees impose high cost on employers of this type of labor;  The mobility of labor is adversely affected by a number of impediments including the use of stamp duties on conveyances as a state revenue raising measure, the use of public housing as a manner which ties disadvantaged groups to particular  locations, occupational licensing restrictions that limit people from undertaking employment in different states, and limitations on the portability of entitlements and superannuations;  Rigidities, inefficiencies  and lack of flexibility in land-use regulations covering land-use zoning, site clean-ups regulations, development approved processes and environmental regulations impact adversely on the adjustment capacities of regions; and inefficiencies in the pricing of public infrastructure  and the regulation of transport and communications increase the cost of these services and act as tax to regional development, in general, or disadvantage particular regions relative to others.

Well-structured  regional development policies can be  the answer to the structural problems mentioned above.  As regional development  is attained, structural defects in the economy may likewise  be straightened out, which means that  the Keynesian approach may be again  used effectively.          

The structural problems cannot be ignored by simply changing the macroeconomic approach. Keynesian or classical,  the structural problems of unemployment will have to be contended with  as it can be an economic time bomb.

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