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08Dec

MPE711: Global Trade And Markets

Abstract

The current report on economics and unemployment discusses the relationship between the growth of economy and unemployment. For short run, the relationship between the unemployment and the economic growth is not effective and it is a loose one. It is not at all surprising to see that the rate of the unemployment decline after some broad measures of economic activity. Okun law focuses on the statistical relationship between the economic growth and unemployment. With the help of the OKun’s law we will be able to know that how of the GDP of the country will be lost when the rate of unemployment increases. In this case the two set of factors has been considered in order to determine the equilibrium unemployment such as functioning of the price and the formation of the wages and the in the labor market find out the similar frictions. It was observed that the civilian labour force in the year 1950 and 2000 gradually increased at an average rate of 1.6%. Moreover, it was also found that there was a declination of the growth rate which was due to the aging of the baby boom generation. When it was further scrutinized it was found that the labor force was declined further to the rate of 0.8% between the years of 2000- 2010 (Basdevant, 2009). In addition to this further studies revealed the fact that there was a decrease in the growth rate and it fell to 0.7% between the years2010- 2020 on an average (Rogers, 2001).

Introduction and hypothesis

In spite of the economic growth in the year 2009,  report on economics and unemployment  for the same year displays the level of unemployment remained quite high. It was only in the fourth quarter of 2012 when the rate of unemployment declined below 8%. The low level of unemployment has several adverse effects on the well being of the people. Due to unemployment, there has been a budget which is leading to lower revenue and higher expenditures. From the view point of the public property, the main factor which is leading to unemployment is the pace of economic growth. Thus, an analysis has been made in order to determine the long run relationship between the economics and unemployment i.e. the overall economic growth. The relationship between the long run growths has been unclear. Different works like Zagler have assumed the structural change is the main object for driving the economic growth which normally involves a cost associated with it in terms of unemployment. This is because there are insistences when the labour market is not flexible which causes delay in adjusting the changes of economy (Dey, 2010).

The hypothesis of the current research is:

Is there any relation between the economic growth and unemployment?

For short run, the relationship between the unemployment and the economic growth is not effective and it is a loose one. It is not at all surprising to see that the rate of the unemployment decline after some broad measures of economic activity. One reason for which unemployment fall after economic growth picks up recession is the some of the organization may have underutilized employees on their payrolls the employers may be able to enhance the output in order to fulfil the raising demand at the outset of recovery without employing some extra workers by increasing the productivity level of the employees (Dey, 2010).

After utilizing the all the workers on hand, it is very difficult increase the level of productivity out unless the organization deploys some more workers. With the expansion of economy, the growth is assessed by the combined rate of labour productivity and supply. The level of employment will continue to rises long as the rate of Gross Domestic Product (GDP) is higher than the labour productivity. If the rate of the growth of the employment is more than the growth of labour force then the rate of unemployment will fall.

The rate of the potential growth of the output is considered to be the key for the long run relationship between the rate of unemployment and GDP growth. Potential output is considered to be the measure of the capability of the economy to generate goods and services when the workers and the raw materials are utilized effectively.  When the rate of unemployment increases, the real GRP fall short of the potential GDP and this is called output Gap (Lydall, 1998).

Case of Economics and Unemployment

In case the rate of GDP falls below growth of labour force then it will lead to unemployment as there will be fewer options for new job. This will also lead to the fall of the proportion of the labour force. If the rate of GDP is more than the growth of the labour force then the level of unemployment will decrease. Again, if the rate of GDP is equal to the rate of the growth of the labour force then also the level of unemployment will increase because there will higher number of workers than demand.

The policy makers who are interested in bringing down the unemployment will make use of GDP policy. In the year 2000, the rate of workforce grew at an average rate of 1.9%. The rate of the growth of the labour force fell to 0.8% between the year 2000 and 2010. It has been forecasted that the rate will further fall by 0.7% per year between the year 2010 and 2020 (Lydall, 1998).

Theory and literature review

There is a clear relationship between the growth of economy and unemployment. The discussion of the relationship between the economic growth and unemployment level was first tackled by Economist Arthur Okun. Okun introduced Okun law which mentioned about the relationship on the subject economics and unemployment. (Grossman and Okun, 2003).

Okun law focuses on the statistical relationship between the economic growth and unemployment. With the help of the OKun’s law we will be able to know that how of the GDP of the country will be lost when the rate of unemployment increases. The logic behind the law is very simple and easy. The relation between the employment and output because the level of the output is dependent on the amount of labour used in the process of production. This implies with the increase in the employment the level of output will increase and with the decrease in the employment the level of output will decrease.  According to the Okun’s law, if the rate of GDP increases by about 4% in each year then there will be 1% decline in the rate of unemployment.

It is very significant to note that Oku’s law is a statistical relation which is based on the regression of unemployment and economic growth (Grossman and Okun, 2003). Moreover, running the regressing can create differing coefficients which are utilized for solving the change on unemployment relying on how the economy grew. It is based on the input used and the stipulate time frame, which are historical GDP and employment data. The below graph shows the regression of Okun’s law:

It is graph representation on the basis of OKun's law to show impact of economics and unemployment

The law underwent several changes in order to fit into the present economic scenario as well as the employment trends. According to one version of Okun’s law, if the level of unemployment declines by 1% then the GNP will be increased by 3%. There is another version of Okun’s law which concentrates on the relationship between unemployment and GDP. According to this version, if the rate of unemployment increases by 1% then GDP of the country will fall by 2% (Okun, 2000).

In his law, Okun also analysed the gap between the potential output and the real output. The rate of the potential growth of the output is considered to be the key for the long run relationship between the rate of unemployment and GDP growth. Potential output is considered to be the measure of the capability of the economy to generate goods and services when the workers and the raw materials are utilized effectively.  When the rate of unemployment increases, the real GRP fall short of the potential GDP and this is called output Gap (Okun, 2000).

Analysis:

The increased rate of economics and unemployment is regarded as one of the most serious factor that must be focused on. It has been observed in the past 20 years that the research on unemployment within an economy has increased and the philosophers are concentrating on the very reason of this problem thereby finding out certain applicable way that can resolve the problem of unemployment (Wang, Wei and Wong, 2010).   The researchers are still now struggling with the researches to find out the main reason that has led to an increase in the unemployment rate in European countries that mainly started from the middle of the 1970 and onwards. The main aim of this research is to provide the discussions regarding the implication of the policies. In this project the discussion will mainly focus on the theories which has been widely accepted within the profession of economics (Haugen and Musser, 2011). The analysis here would be done in order to   find out the main determinants of unemployment in the long run. In this case the two set of factors has been considered in order to determine the equilibrium unemployment such as functioning of the price and the formation of the wages and the in the labor market find out the similar frictions. It was observed that the civilian labour force in the year 1950 and 2000 gradually increased at an average rate of 1.6%. Moreover, it was also found that there was a declination of the growth rate which was due to the aging of the baby boom generation. When it was further scrutinized it was found that the labor force was declined further to the rate of 0.8% between the years of 2000- 2010 (Basdevant, 2009). In addition to this further studies revealed the fact that there was a decrease in the growth rate and it fell to 0.7% between the years2010- 2020 on an average (Rogers, 2001). They stated that it is very easy to predict the level of productivity in the near future but is a hard task to predict the growth of the labour force. According to the economists they have retrieved that there are three time periods that mostly focuses on three different trends in the growth rate of the productivity. As per the information generated it was found that between the years 1947 and 1973 the output of the labors per hour in a private firm increased at an annual rate of 2.8%. In addition to this the productivity showed a fall at a yearly average rate of 1.4% which occurred between the years of 1973 and 1995. Moreover it was also observed that   the rate of productivity again raised to 2.9% in every year between the year of 1995 and 2005. But between the years of 2005 to 2011 the growth rate was declining at an enormous pace to the average rate of 1.6% annually (Oulton, 2000).

this table shows unemployment crisis for economics and unemployement

The table represents the months between the start of the two recoveries and two successive decline in the Unemployment rate.

An example has been considered where in the economy there are three groups A, who is high skilled employed, B is low skills employed and C is totally unemployed. They will be deciding of the labour market in the future. As per the assumption or hypothesis A is assumed to have gain 3 whereas B is assumed to lose 5 and on the other hand C will gain 4. Then the computation revealed that the total social gain is 2. Furthermore it has been assumed that A has been carried through but as per the findings there can be a 50 percent possibility for other to belong to either of the groups of B or C. there will be an expected loss in the other two groups for the reform as 0,5 x (-5) + 0,5 x 4 = – 0,5. This has been followed that there will be majority against the reform under uncertainty (Card, Michalopoulos and Robins, 2001).

There is a very little support of the hypotheses that the level of lower benefits and shorter benefits periods in the unemployment insurance eradicates level of unemployment. The direct relationship between the contribution level of the unemployment insurance and the level of insurance in bargaining will promote wage moderation which on the other hand leads to employment.

The Beveridge curve represents the position of the outflow from unemployment and inflow into unemployment.

This graph shows the economics and unemployment index with respect to the vacancies

The diagram above represents the position of the outflow from unemployment and inflow into unemployment.

Conclusion

The current report on economy discusses the relationship between the growth of economics and unemployment. For short run, the relationship between the unemployment and the economic growth is not effective and it is a loose one. It is not at all surprising to see that the rate of the unemployment decline after some broad measures of economic activity. The limitations of the findings there is a very little support of the hypotheses that the level of lower benefits and shorter benefits periods in the unemployment insurance eradicates level of unemployment. The direct relationship between the contribution level of the economics and unemployment insurance and the level of insurance in bargaining will promote wage moderation which on the other hand leads to employment.

References

  • Dey, S. (2010). Evaluating India’s national rural employment guarantee scheme. The Hague: Institute of Social Studies, ISS.
  • Grossman, N. and Okun, B. (2003). Family psychology and family law: Introduction to the special issue. Journal of Family Psychology, 17(2), pp.163-168.
  • Lydall, H. (1998). A critique of orthodox economics. New York: St. Martin’s Press.
  • Okun, (2000). Journal search results – Cite This For Me. Modern Physics Letters A, 15, p.2007.
  • Basdevant, O. (2009). How can Burundi raise its growth rate?. Washington, D.C.: International Monetary Fund.
  • Card, D., Michalopoulos, C. and Robins, P. (2001). The limits to wage growth. Cambridge, MA.: National Bureau of Economic Research.
  • Haugen, D. and Musser, S. (2011). Unemployment. Detroit: Greenhaven Press.
  • Oulton, N. (2000). Must the growth rate decline? Baumol’s unbalanced growth revisited. London: Bank of England.
  • Rogers, J. (2001). Six centuries of work and wages. Kitchener, Ont.: Batoche.
  • Wang, Z., Wei, S. and Wong, A. (2010). Does a leapfrogging growth strategy raise growth rate?. Cambridge, Mass.: National Bureau of Economic Research.