Macroeconomics Individual Assignment

8/12/2019 Macroeconomics Individual Assignment

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CONTENTS

I. Introduction.2

II. Theoretical Background..8

III. Empirical Evidence......................................................................10

IV. Critical Issues12

V. Conclusion. 15

VI. Reference .......16


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Introduction

Unemployment

Unemployment (or joblessness) occurs when people are without work and

actively seeking work. The unemployment rate is a measure of the prevalence of

unemployment and it is calculated as a percentage by dividing the number of

unemployed individuals by all individuals currently in the labor force. During periods of

recession, an economy usually experiences a relatively high unemployment rate.

According to International Labor Organization report, more than 197 million people

globally are out of work or 6% of the world's workforces were without a job in 2012.

There remains considerable theoretical debate regarding the causes,

consequences and solutions for unemployment. Classical economics, new classical

economics, and the Austrian School of economics argue that market mechanisms are

reliable means of resolving unemployment. These theories argue against interventions

imposed on the labor market from the outside, such as unionization, bureaucratic work

rules, minimum wage laws, taxes, and other regulations that they claim discourage the

hiring of workers.

Keynesian economics emphasizes the cyclical nature of unemployment and

recommends government interventions in the economy that it claims will reduce

unemployment during recessions. This theory focuses on recurrent shocks that

suddenly reduce aggregate demand for goods and services and thus reduce demand

for workers. Keynesian models recommend government interventions designed to

increase demand for workers; these can include financial stimuli, publicly funded job

creation, and expansionist monetary policies. Keynes believed that the root cause of

unemployment is the desire of investors to receive more money rather than produce

more products, which is not possible without public bodies producing new money.

The employment opportunities of all citizens of a country are impractical due to

several reasons. Unemployment of some kind has always been a countrys problem of

modern societies, whether developed or underdeveloped


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Types of unemployment

1. Voluntary unemployment

These are the people who are unwilling to work at the prevailing wage rates and there

are some who are lucky enough to get a continuous flow of unearned income from their

unemployment status.

2. Frictional unemployment

When some workers are temporarily out of work while changing jobs it is called frictional

unemployment, to an extent it is also caused if there is a mismatch between job and the

workers. Such a mismatch can be related to skills, payment, work time, location,

attitude, taste.

3. Casual unemployment

In industries such as building construction, catering or agriculture, where workers

are employed on casual basis, there are chances of casual unemployment occurring

due to short term contracts, which are terminable at any time.

4. Seasonal unemployment

Some nature of job exists for only some time. Work in sugar mills lasts for about six

months. Rice mills work only for a few weeks; they offer employment for only a certain

period in a year.

5. Structural unemployment

Due to a structural change in the economy structural unemployment may take place or

an absence of demand for the workers that are available. Structural unemployment is

also due to technological change.


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6. Technological unemployment

Advanced countries with capitalistic economy are subject to subject to trade cycles.

Trade cycles-especially recessionary phasescause cylinder unemployment in these

countries. During the contraction phase of trade cycle in a economy, aggregate demand

falls and leads to disinvestment, decline in production and unemployment

7. Cyclical unemployment

During the contraction phase of a trade cycle in an economy, aggregate demand falls

and this leads to disinvestments, decline in production and unemployment.

8. Chronic unemployment

It is when the unemployment tends to be a long term feature of a country.

Underdeveloped countries suffer from chronic unemployment on account of the vicious

circle of poverty.

9. Disguised unemployment

It refers to a situation of employment with surplus manpower, in which some workers

have zero marginal productivity so that their removal will not affect the volume of total

output.


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Specific causes of unemployment

1. In-sufficient rate of development.

Even though employment on the whole is increasing, the resent unemployment has

increased. This is so as a result of insufficient rate of expansion and not the actual

decline of employment opportunities as a whole.

2. Rapid rate of population growth.

The rapid rate of population growth in the early fifties has been another cause of

increasing unemployment in the country.

3. Increasing output of the Indian universities.

The galloping rate at which mass production of matriculates, under-graduates is going

on the Indian universities is another cause of the increasing gap b/w employment

opportunities

4. Backward character of Indian agriculture.

In regard to the colossal rural unemployment and under-employment, the very heavy

pressure of population on land and the backward nature of our farming cannot provide

employment opportunities for the far-too-numerous rural populace.


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Relationship between GDP and Unemployment Rates

The relationship between Gross Domestic Product (GDP) and unemployment

rates can be seen by the application of Okuns Law. According to the principles

established by this law, there is a corresponding two percent increase in employment

for every established one percent increase in GDP. The reasoning behind this law is

quite simple. It states that GDP levels are driven by the principles of demand and

supply, and as such, an increase in demand leads to an increase in GDP. Such an

increase in demand must be accompanied by a corresponding increase in productivity

and employment to keep up with the demand.

GDP and unemployment rates are linked in the sense that both are

macroeconomic factors that are used to gauge the state of an economy. A rise in the

GDP is significant in the study of macroeconomic trends in a nation. This is also true of

a rise or decrease in unemployment levels. GDP and unemployment rates usually go

together because a decrease in the GDP is reflected in a decrease in the rate of

employment.

When a recession occurs, the total amount produced, or GDP, decreases. We

know from the study of economic growth that, to produce goods and services, inputs

such as labor and capital are needed. The decrease in production means that some of

the inputs to production will not be used in production. In general, these idle resources

are referred to as unemployed. The type of unemployment most often discussed is the

unemployed labor during a recession.

Such a relationship between GDP and unemployment rates is important in two

ways. A rise in unemployment levels is the natural result of increased GDP levelscaused by an increase in consumer demand for goods and services. Such a rise in both

GDP and employment levels is an indication that the economy is booming. During such

periods, consumer confidence is high and the demand for various goods and services

are correspondingly elevated. In order to meet this surge in demand, manufactures and

other types of companies hire more employees.


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For example, U.S. employers shed 63,000 jobs in February 2008, the most in five

years. On Oct. 1, the Bureau of Economic Analysis reported that an additional 156,000

jobs had been lost in September. In November 2008, employers eliminated 533,000

jobs, the largest single month loss in 34 years. For 2008, an estimated 2.6 million U.S.

jobs were eliminated. The unemployment rate in the U.S. grew to 8.5% in March 2009,

and 5.1 million jobs had been lost since the recession began in December 2007. The

full impact of a recession on employment may not be felt for several quarters. After

recessions in Britain in the 1980's and 1990's, it took five years for unemployment to fall

back to its original levels. Many companies often expect employment discrimination

claims to rise during a recession.

The opposite is true in the case of a deflation, which also shows the relationship

between GDP and unemployment rates. When there is a dip in the GDP caused by a

decrease in consumer confidence and a corresponding reduction in demand,

companies must adjust to this low demand. Part of the adjustment process includes the

shedding of workers who may have become redundant in the face of sluggish demand

by consumers.

At times like this, companies look for ways of conserving money since they are

no longer making as much money as they used too. One of the cost-cutting measures

includes mass sacking of employees whose salaries the companies can no longer

sustain. Signs like this are indicators to economists that the demands for goods and

services have dropped and that the GDP level is also on a downward slope.

Note that even in favorable economic times, the unemployment rate is never

zero. The "natural rate of unemployment," or the average rate of unemployment around

which the economy fluctuates, is not zero. The natural rate is determined by a number

of factors, but in the most basic sense, there is natural turnover in the labor force at alltimes. During a recession, however, the actual unemployment rate rises above the

natural rate.


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Theoretical Relationship between GDP and Unemployment Rates

Okuns Law

In its most basic form, Okun's law investigates the statistical relationship between

a country's unemployment rate and the growth rate of its economy. The economics

research arm of the Federal Reserve Bank of St. Louis explains that Okun's law "is

intended to tell us how much of a country's gross domestic product (GDP) may be lost

when the unemployment rate is above its natural rate." It goes on to explain that "the

logic behind Okun's law is simple. Output depends on the amount of labor used in the

production process, so there is a positive relationship between output and employment.

Total employment equals the labor force minus the unemployed, so there is a negative

relationship between output and unemployment (conditional on the labor force)."

Yale professor and economist, Arthur Okun, was born in November 1928 and

passed away in March 1980 at the relatively young age of 51. He first published his

findings on the subject in the early 1960s, which have since come to be known as his

"law." Okun's Law is, in essence, a rule of thumb to explain and analyze the relationship

between jobs and growth. A talk from Federal Reserve Chairman, Ben Bernanke,

perhaps most succinctly summarizes Okun's law basic concepts:

"That rule of thumb describes the observed relationship between changes in the

unemployment rate and the growth rate of real gross domestic product (GDP). Okun

noted that, because of ongoing increases in the size of the labor force and in the level of

productivity, real GDP growth close to the rate of growth of its potential is normally

required, just to hold the unemployment rate steady. To reduce the unemployment rate,

therefore, the economy must grow at a pace above its potential.

More specifically, according to [the] currently accepted versions of Okun's law, toachieve a 1 percentage point decline in the unemployment rate in the course of a year,

real GDP must grow approximately 2 percentage points faster than the rate of growth of

potential GDP over that period. So, for illustration, if the potential rate of GDP growth is

2%, Okun's law says that GDP must grow at about a 4% rate for one year to achieve a

1 percentage point reduction in the rate of unemployment."


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It is most important to note that Okun's law is a statistical relationship that relies

on a regression of unemployment and economic growth. As such, running the

regression can result in differing coefficients that are used to solve for the change in

unemployment, based on how the economy grew. It all depends on the time periods

used and inputs, which are historical GDP and employment data. Below is an example

of an Okun's law regression:

The law has indeed "evolved," or changed over time to fit the current economic

climate and employment trends at the time. One version of Okun's law has stated very

simply that when unemployment falls by 1%, GNP rises by 3%. Another version ofOkun's Law focuses on a relationship between unemployment and GDP, whereby a

percentage increase in unemployment causes a 2% fall in GDP.


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Empirical evidence between GDP and Unemployment Rates

The correlation between unemployment and growth is ambiguous. Bean and

Pissarides (1993) examine the correlation between unemployment and (labor and total

factor) productivity growth for OECD countries over the period 1955-1985. The authorsfind weak evidence of a negative relationship between the two over the full sample, but

no clear relationship within sub-periods. Caballero (1993) uses quarterly time series

data from 1966:1 to 1989:4 for the U.S. and U.K., to find that the correlation between

unemployment and per capita growth is unclear: at medium frequencies, it is positive for

both countries; while at very low frequencies, it is positive for the U.K. and zero or even

negative for the U.S. Results using labor productivity instead of per capita growth are

similar. Bruninger and Pannenberg (2002) show that an increase in unemployment is

associated with a decline in productivity growth in Europe and the U.S. during the period

1960-1997. Dell'Anno and Solomon (2008) find a negative correlation in the U.S.

between quarterly changes in the unemployment rate and the quarterly growth rate of

GDP between 1970 and 2004.

Most empirical research shows that productivity growth has a negative impact on

unemployment. Based on a panel of 20 OECD countries spanning 1960-1996,

Blanchard and Wolfers (2000) find that TFP growth has a negative effect on

unemployment. Fitoussi et al. (2000) use data for 19 OECD countries over the period

1960-1998 to find that the Hodrick-Prescott-smoothed rate of change of labor

productivity has a negative effect on unemployment. Using individual data in the U.K.

spanning the period 1982-1999, Zagler (2006) finds that individual value added growth,

measured by the GDP growth rate of the region and the sector in which the individual

resides, has a negative impact on the individual unemployment rate, which captures the

number of days a person spends being unemployed over the entire year.

Using a panel of 15 industrialized countries covering the period 1965-1995,

Pissarides and Vallanti (2007) find that TFP growth has a substantial negative impact

on steady state unemployment, both in terms of the estimated elasticity and in terms of

the contribution of TFP growth to the explanation of the change in the unemployment

rate. Using historical time series for the U.K. from 1871 to 1999, Hatton (2007) finds that


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faster productivity growth reduces the non-accelerating inflation rate of unemployment

(NAIRU) over the long run.

However, some studies find that the impact of growth on unemployment depends on the

type of analysis being performed. Tripier (2006) describes the empirical co-movementsof unemployment and labor productivity growth by means of spectral analysis over

1948-2000 for the U.S. The author finds that the co-movements are positive over the

business cycle, but negative in the short and long run. Using a panel of 20 OECD

countries spanning 1974 to 1989, Aghion and Howitt (1992) report an inverted-U impact

of GDP growth on unemployment. The results imply that countries with too fast or too

slow growth rates have relatively lower unemployment rates, while countries with

intermediate growth rates suffer the highest unemployment rates.


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Critical issues

Causes of Unemployment in the Arab Countries: High unemployment rates in the

Arab societies can be attributed to economic, social and political reasons. In addition, it

can also be attributed to internal or external causes. The most important causes ofunemployment in the Arab countries would be summarized in the high population

growth rate, increasing from 218.239 million inhabitants in 1990 to 326.112 million

people in 2007. In addition, the most prominent manifestation of the failure in economic

development plans is the reliance on foreign loans (for non-oil producing countries) and

the lack of systematically economic planning in which there is no match between the

educational programs in most Arab countries and the application of policies aiming to

open economy in addition to the shift towards privatization programs that have led to

abandon large numbers of employees in private and public sector enterprises. Besides,

the unsuitable distribution of local resources is considered another important reason of

unemployment in Arab world.

The Relativity Impact of Economic Growth on Unemployment Rates: The

difference in the nature of the growth achieved and its impact on unemployment is what

makes economic policies in developing countries fail to reduce unemployment rates

although growth rates were fairly high. The economic growth is regarded as a

quantitative change occurring in two directions: one associated with an increased labor

productivity,which usually does not lead to the creation of additionaljobs and the other

direction is linked to an increase ofjobs, which reduce the unemployment rate according

tothe nature of the growth achieved. In fact, growth whichis associated with increased

productivity cannot lower the high unemployment rates.

Analysis of Unemployment in the Arab Countries: What distinguish the economics

of Arab countries are

unusually high rates of unemployment against the

internationalstandards. Arab Labor Organization states that current situation of unemployment in

Arabiccountries is the most dangerous in the world. It indicatesalso tbillion to raise

their economic growth rate from 3% to 7% that the Arab economies must invest about $

70and create five million jobs, to reduce unemployment rates and to make them within

the acceptable rates (Figure 1).


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World Appl. Sci. J., 18 (5): 673-680, 2012

Fig. 1: The needed percentages to reduce unemployment rates.

Fig. 2: The needed growth percentages to reduce unemployment rates.


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The Relationship between Growth and Unemployment: It is noticeable that a

significant correlation existsbetween growth and changing rates of unemployment.High

rates of growth indicate the market need foradditional labor to be employed from the

surplus of the labor force. On the other hand, financial recession increases rates of

unemployment due to job loss.It has to be highlighted that there is a weak relationship

between the growth rates and unemployment rates; ifeconomic growth gets increased

by, for example, 2.0 %, itdoes not mean that the unemployment rate gets decreased by

2.0%. It is found that the same rates of economicgrowth do not have the same impact

on unemployment inall countries.

The Relationship between Growth and Unemployment, aCase of Jordan: As for

the relationship between growth and unemployment in Jordan, like some Arab countries

it suffers from the abnormal rise in the unemployment rate, consequently affecting

development and openness in the Jordanian economy. Analyzing growth rates and

unemployment for Jordan shows the direction of the high growth rate and relative

decline in the unemployment rate in the period (2006 - 2011).


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Conclusion

The correlation between real GDP growth and unemployment is very important for

policy makers in order to obtain a sustainable rise in living standards. If GDP growth

rate is below its natural rate it is indicated to promote employment because this rise intotal income will note generate inflationary pressures. In contrast, if the GDP growth is

above its natural level, policy makers will decide not to intensively promote the creation

of new jobs in order to obtain a sustainable growth rate which will not generate inflation.

The slope of unemployment in Okuns law in around -0.5 and potential GDP growth is

around 5.7 percentage points and the variables are negatively correlated as predicted

by the theory. These values are particularly important for policy makers in order to

obtain an optimal relation between unemployment and real GDP growth. In the previous

years, economic growth was above potential which has generated inflationary

pressures.


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Reference

1. en.wikipedia.org/wiki/Unemployment

2. http://www.econport.org/content/handbook/Unemployment

http://www.investopedia.com/articles/economics/12/okuns-law.asp3. en.wikipedia.org/wiki/Okun's_law

4. www.jstor.orgstable

5. idosi.orgwasjwasj.pdf

6. thescipub.compdf.jssp...

7. http://www.econbiz.de/Record/economic-growth-and-unemployment-in-arab-countries-

is-okun-s-law-valid-moosa-imad/10003738465
http://www.investopedia.com/articles/economics/12/okuns-law.asphttp://www.econbiz.de/Record/economic-growth-and-unemployment-in-arab-countries-is-okun-s-law-valid-moosa-imad/10003738465http://www.econbiz.de/Record/economic-growth-and-unemployment-in-arab-countries-is-okun-s-law-valid-moosa-imad/10003738465http://www.econbiz.de/Record/economic-growth-and-unemployment-in-arab-countries-is-okun-s-law-valid-moosa-imad/10003738465http://www.econbiz.de/Record/economic-growth-and-unemployment-in-arab-countries-is-okun-s-law-valid-moosa-imad/10003738465http://www.investopedia.com/articles/economics/12/okuns-law.asp

Macroeconomics Individual Assignment

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