Term Paper on "Economics Unemployment as a Constructive"

Term Paper 5 pages (1424 words) Sources: 3 Style: APA

[EXCERPT] . . . .

Economics

Unemployment as a constructive aspect of economic life

Unemployment is a negative economic phenomenon that refers to that part of the active population that is willing and able to work for pay, but is unable to find employment, due to an unstable relationship between economic development on the one hand, as a source of labor demand, and population's evolution on the other hand, as a source of labor supply.

On a long-term, unemployment is undoubtedly considered to be a negative phenomenon, with great costs for both the directly affected persons and the economy and society as a whole. In the United States the unemployment rate for 2006 reached 4.6%, with an unemployment level of 7,001,000. Puerto Rico has the highest unemployment rate, 9.9% in November 2006, while Hawaii has the lowest unemployment rate, 2.3% in November 2006.

Long-term unemployment leads to an increased level of poverty and crime. It also causes political instability and mental health problems.

However, a low unemployment rate may help prevent and diminish mass poverty and violence. Short and medium term unemployment in considered to have certain economic advantages as well. The most important advantage for the economy is that unemployment tends to reduce inflation, following the Phillips curve, or to decelerate inflation, following the NAIRU/natural rate of unemployment theory. The Phillips curve represents the relationship between unemployment and inflation. On the short-term, inflation in inversely related to unemployment. If unemployment rises, inflation drops, while if unemployment drops, inflation rises. This phenomenon described by the Phillips curve tends to be a problem for regulators who want to keep both the inflation and the unemployment at low levels. However, long-term Phillips curve is completely different to the short-term one. On a long-term, no correlation between inflation and unemployment has been observed. The long-term Phillips curve is considered by the classical economists to be the equilibrium level of unemployment of the economy, representing the independence between unemployment and inflation on a long-term. The intersection between the short-term and the long-term Phillips curve represents the expected level of inflation. Therefore, unemployment between natural unemployment leads to a higher level of inflation than expected, while unemployment higher than natural unemployment leads to a lower level of inflation than expected. So, when unemployment reaches a high level, costs rise less rapidly than prices, forcing inflation to slow down. Also, when employment reaches a very low level, this will cause costs to rise faster than prices, forcing the inflation to speed up.

However, when situated in between these two extreme levels, the rate of unemployment is high enough that costs and prices rise at the same level, so inflation stagnates. This rate of unemployment level is called the NAIRU, non-accelerating inflation rate of unemployment. As the unemployment decreases, employees demand higher wages and consequently the producers rise the prices of their products and services in order to gain higher profits. But it seems that "the importance of NAIRU is more theoretical than practical, because the rate is a moving target, shifting from business cycle to business cycle with the changing structure of the economy."

Another aspect where unemployment may be considered beneficial concerns the frictional employment, that involves people being temporarily between jobs and searching for new ones. Frictional unemployment only covers a small percentage of the unemployment, because workers can search for new jobs while being employed and employers can search for new employees before firing current ones. So, this type of unemployment allows employers not to settle for employees that do not correspond to their needs. A lower level of unemployment also allows workers to find better jobs that satisfy their desires and needs.

Unemployment is also considered to be constructive because it encourages labor productivity and profitability. In certain cases, employers tend to keep their employees in fear of losing their jobs, which determines them to work harder and to work under low wage conditions: "in his seminal 1943 paper on the political business cycle, Michael Kalecki (1971) argued that 'industrial leaders' feared full employment because the economic insecurity created by unemployment was necessary to keep wages low and maintain work intensity and discipline on the shop floor." Kalecki's opinion was based on the treatment used by some employers on their employees. Some employers put the threat of dismissal in… READ MORE

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