Eurozone Unemployment

As a result of the financial crisis in 2007 countries within the European Union have struggled to maintain low levels of unemployment, this is the outcome of retracting economies and austerity measures. Across the Eurozone the average unemployment rate has reached a peak of 12%. The article identifies the occurrence of this peak as countries such as Greece, Spain, and Portugal all have unemployment rates around 25%. There are also fears that unemployment will further increase during April as a result of the Cypriot crisis.

Unemployment can be defined as “Those out of work, actively seeking work at the current wage rate”. This can be calculated in two ways, the first being through a claimant count (those requiring unemployment benefits) and the second being through a labour force survey. The labour force survey most often releases figures higher than through the claimant count, which is why governments tend to publish the claimant count unemployment rate.

Analysis:

As the current unemployment rate of the Eurozone is at 12% it is understood that there is a clear surplus of people willing to work. This can be clearly shown through the demand and supply relationship for labour.

Picture1

The highlighted triangle represents the unemployment as labour is demanded at LD but supplied at LS. This shows a simple representation of the current unemployment, but it does not display the causes of it.

The causes of this unemployment can be recognised through the article as cyclical and structural. Germany maintains to be the manufacturing powerhouse of the Eurozone helping keep unemployment of the country down, however countries such as Greece and Portugal do not have strong industry. This is the presence of structural unemployment as the economies require people to work jobs that they are not trained for or overqualified. The cyclical unemployment was initially the result of the initial financial crisis recession, but double-dip recession has magnified the impact on unemployment. Countries that struggle to create economic growth tend to struggle creating jobs.

The article identifies that as a result of this continuous unemployment, the Eurozone has fallen back into recession. Manufacturing industries and other business have seen a decline in business activity, thereby showing a lack of aggregate demand throughout the European Union.

Picture2

The graph above shows how unemployment in the region has affected growth prospects for the future, as shown through the movement from Eq to Eq1. The shift in aggregate demand inwards is a result of unemployment, as when people do not have a salary their effective demand is further restricted.

Evaluation:

There are clear limitations to the initial demand and supply of labour model above, this model fails to show where the unemployment is allocated (i.e. agriculture, finance, or manufacturing). Furthermore, it does not accurately represent the actual quantity of those currently unemployed. However, it does help establish the significance of unemployment as it contributes to understanding that there is a fall in aggregate demand, and therefore a dampening on growth prospects for the European Union.

The aggregate demand and supply diagram clearly shows the effect of unemployment on the European economies, and it also shows how the price level has gone down. This is true to an extent as European inflation is estimated to be at 1.8%. This identifies that in the short run disinflation is occurring within the Eurozone. This low level of inflation as a result of the drop in aggregate demand signifies that the European Union economies are struggling to achieve growth and employment. However, in the long run there may be the occurrence of reflation as the economies pursue growth, through creating more jobs and reducing unemployment.

The continuous unemployment and resultant fall in aggregate demand will have a negative effect on European manufacturing. There are already signs that business activity is diminishing (PMI=46.8 Contraction), and further unemployment will only hinder European manufacturers.

Currently across the Eurozone governments are pursuing austerity budgets to attempt to reduce debt, and climb out of recession. However, this is keeping unemployment at high rates. This attributes to a Keynesian solution of spending more to save more. If governments were to create more debt in pursuit of structural investments there may be a spur in economic growth. This can take the form of updating road networks, creating new airports, and building factories. This would help significantly aid in reducing unemployment rates in countries such as Greece, which need an infrastructural upgrade regardless.

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Types of Unemployment

Structural:

Changes in labour skills demanded, leaving different groups unrequired e.g. 1980s manufacturing in the UK, Welsh miners, and Detroit in 1990

Cyclical:

People lose jobs in a recession (two consecutive quarters of negative growth) this has strong links with the business cycle. This can lead to structural unemployment as the market becomes more concentrated on different business sectors.

Frictional:

People are in between jobs looking for work, for example those recently fired or quit. This is linked with the bureaucracy and procedure of finding work, as it takes times for checks, assessments, and interviews. This is also created through labour laws, labour unions, and the time taken for wage negotiation.

Seasonal:

This is unemployment during a specific season. An example of this is a ski instructor during the summer or ice cream salesman during the winter. There are certain jobs which have an aspect of this such as agricultural workers as there Is a wait time between sowing and planting, and the time of harvest.

Geographical:

Those with the required skill to work, but the jobs are not located where they can work. For example hypothetically a teacher is trained in Scunthorpe but there are no teaching jobs there; they are all in London, and the teacher is unable to commute to London.

The most dominant types of unemployment are structural and frictional; currently there has been a rise in cyclical unemployment as a result of the financial crisis. When an economy struggles to grow or experiences negative growth there is usually a high rate of unemployment as there are parts of the economy that are underutilised.

Unemployment can be shown through a variety of graphical methods all with their own merits. The most common is a simply supply of labour and demand of labour graph. Unemployment can be simply displayed through an inward shift of aggregate demand, and also operation in a PPF that is not on the curve. There is also the Marginal Revenue Product of Labour which can be graphed and this is used to argue that minimum wage can be beneficial.

South Africa: Sink or Swim

South Africa is currently suffering from a high rate of unemployment making it difficult for the economy to grow. Forecasted growth rates have already been downscaled as the largest economy in Africa is struggling to meet targets. The countries main contributor to GDP can be identified as consumer spending and this is why the persistent unemployment is having a considerable effect on growth forecasts.

Key Terms:

Unemployment – “Those out of work, actively seeking work at the current wage rate”

GDP/Growth – Measured by the output of an economy (gross domestic product)

Consumer Spending – Spending on retail goods, energy consumption, transportation, housing costs, and other areas where disposable income is spent.

Due to the high levels of unemployment it can be noted that there is a decline in aggregate demand within the economy. Colen Garrow states that the retail sector is weakening and there is going to be pressure overall as there is a lack of demand. It can be noted that to an extent the South African economy is contracting as there has been increased inflation as a result of a cost-push and fall in aggregate demand (shown below).

Picture1

The shift for aggregate demand from AD to AD1 is a result of the rise in unemployment, the people have less spending power and therefore there is an overall decrease in consumer demand. The shift of aggregate supply is a result of the tightening credit environment as firms struggle to meet their costs. The red rectangle represents the inflationary response in the economy as a result of the shift in aggregate supply. So as a whole the South African economy has retracted as output has significantly decreased (resulting in forecasts for future growth to decline) and there has been an inflationary response, as the price level has increased.

There is also the factor of unemployment which is 24.9% falling from the peak during Q4 of 2012 at 25.5%.This is shown simply below with a demand and supply relationship of labour in South Africa.

Picture2

Currently in the market labour is only being demanded at the point of LD but the supply is at LS. This surplus of labour is the current unemployment. With so many out of work and seeking work it is clear that economy is not working to full capacity. If a production possibility frontier for the economy was shown it would be operating within the curve. This further explains the economies inability to have substantial growth.

Consumer spending has radically decreased, making it difficult for the economy to grow and therefore attempt to combat the unemployment. This is realised by the fact that private sector demand for credit dropped from 10.09% to 8.64%. This is why the retail sector is struggling, as the unemployment and inflation has led to the decline of demand.

The unemployment in South Africa can be seen as a combination of structural and cyclical unemployment. Mining has been one of the major consumers of labour in the region, and recent closing of mines and movement by companies to other African regions for mining has meant a structural change in labour demand. The cyclical unemployment is a result of the struggling economy, as different firms reduce the amount of people they employ to meet the higher costs of production.

In the short run the economy is not likely to recover, growth is a must if the government aims to combat the high rate of unemployment. It is essential to restore consumer confidence in the economy, and also enable people to obtain credit more easily as to restore the aggregate demand of the economy.

In the long run for the economy to attempt to maintain growth, eliminating unemployment is essential to attempt to get the economy working back at a point of the PPF. However this could lead to an inflationary response in the form of a demand pull, and the government will need to begin considering how to reduce already increasing inflation as a result of increasing production costs.

Currently in the South African economy the rate of unemployment is pulling it down, in this situation there are no winners within the country. Exports may become more favourable as the inflation will weaken the South African Rand, but make investing in South Africa unlikely. To solve the unemployment in South Africa is difficult as a result of its cyclical and structural qualities; the first step would be to create more job opportunities. However, it is also essential that a greater majority of people achieve education and training whether it is academic or vocational to help improve employability prospects.

Expected growth by 2014 is forecasted at around 3.4% which is still considerable in comparison to some countries in the EU. There is still risk though investing within the country and the government must do more to encourage foreign investment and begin a round of serious structural investment such as roads to create jobs and spur on growth.

There is the potential for South Africa to climb out of the current situation, and unemployment stands at the centre of it. The country is still Africa’s biggest economy and will continue to be so if it can achieve consistency with its currency and sustained growth.

Unemployment in Goa

Goa Taxi Regional Employment Case Study

Due to the halt in mining activity in the Goa-Karnataka region there has been an increase in unemployment. The government is attempting to reduce the unemployment from the mining market by introducing more tourist taxis in the region to go to the Dudhsagar Waterfalls due to its increasing popularity in India.

Analysis:

Unemployment is defined as: People who are out of work but actively seeking work at the current wage rate.

To decrease the unemployment the government has chosen to intervene by increasing the supply of labour in the taxi market to meet the demand by tourists. This will counteract the unemployment that occurred due to the halt of the mining activity in the region; the idea is that those who lost their jobs will be able to become tourist taxi drivers. Taxi driving in the region could support similar salaries to the workers, as their salaries are based upon how many customers they receive as they are paid a cut of their fee.

Unemployment in the Mining Market:

Picture1

The quantity of labour demanded has decreased due to the halt of mining activity, since there has been no effect on the quantity of workers there is the presence of a surplus. A surplus in this sense represents the existence of unemployment in the market. There is a considerable gap in the quantity of labour demanded versus the quantity of labour supplied; this gives the miner several options. The miners could offer to work at the equilibrium price even though the demand for labour has dropped thereby increasing the price. The other more likely option is to simply leave the market and seek employment elsewhere, preferably at a similar wage rate and working conditions. This alongside the governments support is what transfers the now underutilised human capital and places this in the tourist taxi market, having the following effect.

Picture2

From the graph above it can be noted that there is an outward shift in the supply curve as more taxi drivers have entered the market. This has caused a fall in the price of the labour (fall in wages). This has not caused a surplus in the taxi driver market, as the government recognised that there was a shortage of taxi drivers for this tourist destination and has now been able to meet the demand. It should be noted that this increase in supply won’t be instantaneous as it will take time for those that were employed in the mining market to move to the taxi market due to licensing requirements and the expense of a taxi car.

Evaluation:

The government has successfully solved part of the unemployment issues caused by the halt of mining within the region. There are however several possible consequences to the employment boost in the taxi market. These issues can be identified as competition, environmental effect, future unemployment, and a decrease in government revenue.

Due to the increase of taxi drivers there will be greater competition to get customers, especially during off-season times. The taxi driver’s wages will be dependent on how many passengers they will get and the size of the fee. The taxi market can be identified to contain strong elements of perfect competition, as the consumers have extensive choice of supplier especially after an increase in the number of taxi drivers. The consumer also gets the lowest price possible from the drivers as they are looking for as many customers as possible, and the increase in taxi drivers means greater competition. In a sense there is also freedom to enter and exit the market, because once the taxi driver has a car and a license they can choose when to drive or not. This can be favourable at times when it is off-season and there are not as many tourists to meet the supply of taxis. The consequence of this is the possibilities of making low wages in one particular month, taxi drivers may seek out other work, drive their taxi elsewhere, or simply become underutilised and therefore not benefit economy or themselves. There are however factors that represent the monopolistic nature of the market. It is possible for certain taxi drivers to have nicer cars or offer to double up as tour guides, this may give that particular taxi driver market power in the short-run therefore an advantage.

There may be adverse effects on the environment of the local area due to the increase in the number of taxi drivers. It can be argued that the governments halt to mining activity in the region was to solve the environmental externality of mining. The possible effect of increased taxis may be small in comparison to the pollution caused by mining, however a result of more taxis means that there is a bigger flow of human traffic. The report mentions the need to ensure the continued protection of the rare Olive Ridley Turtles who lay eggs within the popular tourist region, the increased presence of people may affect their population. The report also mentions that the road used to get to the tourist destination is through the forest on a dirt road, this means that there may be increased erosion in the area. What makes the region a tourist destination is not only the waterfalls, but also the natural beauty of the surrounding areas. Therefore, increased traffic in the area may provide a boost to the tourism industry but prove to be a risk for the value of the region.

In the long term there may be more unemployment, as it is unlikely that all of those who had jobs in the mining industry will be able to enter the taxi driver industry. The government would need to find another source to create new employment opportunities. There may also be a decline in government revenue as more tourists will use the taxis rather than the train service (government owned) that runs a route from Goa to the popular tourist destination.

The government has effectively solved the unemployment problem that arose from the halt in mining in the region, but in a short-term manner. There may be consequent issues to the solution the government has opted for. This solution very much depends on how successful the region maintains itself to be a tourist destination in the future.

Introduction to Macroeconomics

Four Main Economics Goals of an Economy:

  1. Stable Rate of Economic Growth
  2. Low Unemployment
  3. Low & Stable Inflation (standard target of 2%-4%)
  4. Satisfactory Balance of Payments

Other Pursuable Goals of an Economy:

  1. Environmental Sustainability
  2. Economic Equality

Growth:

  • Commonly Measured by Gross Domestic Product (GDP)
  • Measure the Output of the Economy (value)

Unemployment:

  • Commonly Measured by Claimant Count & Labour Force Survey (ILO)
  • “Those out of work, actively seeking work at the current wage rate”
  • Labour Force Survey is thorough and usually reveals higher numbers of unemployment
  • Claimant Count is problematic as not everyone is eligible for unemployment benefits

Inflation:

  • Commonly Measured by the Price of a “Basket of Goods”
    • i.e. Consumer Price Index (CPI) or Retail Price Index (RPI)
    • Inflation: Increase in the Average Price Level of an Economy

Balance of Payments:

  • Referring to the accounts of an economy, national scale balance sheet
  • There are Credits which are considered as Injection (e.g. exports or factor earnings)
  • There are Debits which are considered as Leakage (e.g. imports or factor payments)