The Role of Government in Dealing with the Issue of Unemployment - Assignment Example

For any country it is very important that the government controls the level of unemployment in the economy. The growth of a country is deeply connected to the number of people employed in that country. When there will be unemployment in a country people will not be in a position to deal with day-to-day expenses. This will give rise to economic instability. What it means is that unemployment is perilous for a country which is the reason why the governments of both developing and developed countries are taking steps to cope with this problem in a better way. Actually, when employment starts to create problems, no one but government can handle it in the right way. Now, before throwing some light on the importance of government in reducing the rate of unemployment, it is crucial to shed some light on the types and methods of measuring unemployment. Unemployment and its types: The definition of unemployment is quite varying. In simple words, it is a situation where people want jobs but they don’t become able to find any. But, according to the International Labour Organisation (ILO), if a person is working at least for an hour a week, he is considered employed. Here, definition of employment will help understanding what unemployment is all about. The LFS( Labour Force Survey ) definition of employment is anyone (aged 16 or over) who does at least one hour’s paid work in the week prior to their LFS interview, or has a job that they are temporarily away from (e.g. on holiday). Also included are people who do unpaid work in a family business and people on government supported employment training schemes, in line with ILO definitions [1]. Anyone who doesn’t fit into this aforementioned definition is considered to be an unemployed person. Still, you can find following types of unemployment in the world around you. Cyclical Unemployment: This type of unemployment takes place in economic downturns and changes with an improvement in economy. Frictional Unemployment: It occurs when people leave current jobs to find a new one. Sometimes, it is also referred to as Search Unemployment. Structural Unemployment: It occurs due to technological revolution, i.e. when computers replace humans. However, new job vacancies for computer operators also get produced. Classical Unemployment: It occurs when real wages exceeds the market equilibrium wage. Hidden Unemployment: This type of unemployment refers to those who may have stopped looking for jobs but are unemployed. Generally, these people are not counted in the unemployment statistics. Hardcore Unemployment: Unemployed people with disabilities fall into this category of unemployment. Involuntary Unemployment: All those people who want jobs and actively search to get one but don’t become able to get employed fall in this category. Measurement of Unemployment: As different unemployment types exist in the real world, it is crucial to use right methods to measure those different types. Unemployment rate is the best way to measure the extent of unemployment in any country. Economists all over the world, give huge importance to the measures of unemployment rate for designing the policies of economic development. The most widely used measure of unemployment rate is mentioned below[2]: Unemployment Rate = {(Total number of unemployed workers)/Total Labor force} ×100 However, to measure unemployment few specific methods are used by economists and few of them are covered below. Claimant Count: This method was usually used during the 1980s and 1990s. The basic thing about this method is to count those unemployed heads who are receiving unemployment benefits. The good thing is that measurement can be done by using administrative records, which is the reason why you don’t have to suffer from sampling errors. But, it is a fact that many countries are now using other computation methods which is the reason why it is not logical to compare results of this method with other methods. Also, it provides relatively inadequate data as only those people who receive unemployment benefits and are registered in the employment exchanges are taken into consideration. Labour Force Survey: The Labour Force Survey is introduced due to the limitations of Claimant Count. This computation method works by collecting household samples. Herein, relevant data is collected by offering a questionnaire to people who may be in workable age group. This method is hugely effective in determining the number of people underemployed, unemployed or employed. Though this method is according to international standards but it is not free from faults. For instance, sampling methods can contribute towards statistical errors and subjective answers to specific questions can affect the overall results. These two methods are usually used to measure the unemployment and provide government with all important figures to take right steps. By making use of these methods, it was found in a recent report that the unemployment rate in UK rose to 6.5%. "The rise in the headline level of unemployment above 2 million is only part of the sorry story. Much more alarming is a surge in claimant unemployment in February - the monthly increase of 138,000 in the number of people claiming Jobseekers Allowance surpasses even the darkest days of rising unemployment in previous recessions. The surge was driven by a flood of new claimants, reflecting todays other ONS statistics showing that firms cut almost a quarter of a million employees (248,000) in the final three months of 2008 and made 266,000 people redundant in the three months ending in January 2009[4]. You can see that these figures can be of great help for government and it is their duty to bring unemployment rate under control otherwise several problems will crop up. In fact, persisting unemployment doesn’t only have economic cost but social cost as well. Both of these costs are briefly discussed below. Economic Cost: Unemployment causes a waste of scarce economic resources and reduces the long run growth potential of the economy. An economy with high unemployment is producing within its production possibility frontier. The hours that the unemployed do not work can never be recovered.  But if unemployment can be reduced, total national output can raise leading to an improvement in economic welfare [3]. Apart from the waste of scarce resources, several other problems can hurt economy as a whole. Since government has to give certain unemployment benefits, it reduces the tax revenues and increases the level of borrowing. Economic instability usually takes place with an increase in government spending. Furthermore, loss of human capital can take place after a long duration of unemployment. It is so because people can lose their skills due to inactivity. A reduction in life expectancy of workers is another implication of unemployment which can badly hurt the economy as a whole. Social Cost: Unemployment has its social cost. With a rise in the rate of unemployment you can see people getting depressed, which is one of the major reasons behind the increase in suicides. Consider following graph to get an idea about the relationship between unemployment and suicide in Japan. You can easily see that there was an increase in suicide rate with an increase in unemployment. In addition to suicide, divorce rate is also directly related to an increase in unemployment. When people don’t become able to get jobs to secure some money, there remains no other choice for them but to use unethical means to earn money. That’s the reason why an increase in crime rate is also closely tied to an increase in unemployment rate in different parts of the world. Increase in poverty along with income inequality can also be taken as the social cost of unemployment. Also, the increase in depression, stress and other cardiovascular diseases are deeply connected to an increase in unemployment rate. Here, it is also significant to mention that social problems can sometimes convert into economic issues. For instance, when people don’t get money, it becomes impossible to deal with mortgage payments and foreclosures take place. Increase in the rate of foreclosures results in devaluation of homes which can give rise to an economic crisis. Same situation can be seen in the United States where people are currently facing the worst housing crisis and unemployment has a big role to play in this entire situation. The Role of Government in Dealing with the Issue of Unemployment: By going through all of the aforementioned details, it becomes pretty clear that different types of unemployment exist in the world and all those types can have economic as well as social cost. Now, if government doesn’t take some initiatives to reduce this rate of unemployment, it can become extremely difficult to stabilize the economy of a country. It is the responsibility of government to make use of expansionary fiscal or monetary policy to create jobs. Although there are several steps that can be taken on part of government but few of the suggestions are mentioned below. The natural rate of unemployment is basically a combination of structural and frictional unemployment. To alter this natural rate of unemployment government can make some changes to unemployed benefits. Also, the minimum wage should be increased so people may find it more attractive to work rather than enjoying the unemployed benefits. In UK, same sorts of tactics are being used by the government as minimum wage has now gone up from £3.60 to £4.50. To overcome structural unemployment government have to take some steps to enhance the occupational and geographical mobility of labour. On some occasions, unemployment increases when businesses start to take actions to reduce payroll costs. It is usually done in a rather sluggish economy. The government herein can make use of monetary policy to reduce the overall interest rate. This is to encourage businesses to borrow money and to employ more people in order to achieve business expansion. Using fiscal policy in a right way can create some positive effects on unemployment. Here, government spending is to be increased by investing on specific government projects. When government invests in hospitals, schools or bridges, it opens doors for labours to get jobs. Though these steps are pretty helpful but it is crucial to mention that certain amount of unemployment is literally impossible to control. It is so because some people will always be switching jobs. Moreover, the government can not adopt stringent policies to increase unemployment because economy will be over-heated and inflation will start to rise. It is due to this particular reason that unemployment rate anywhere below 4% is taken as full employment. So, a delicate balance has to be maintained by government between unemployment and inflation as both of the situations tagged along with severe economic and social cost. But, the fact remains that if a country don’t want to suffer from the implications of unemployment, government has to come forward for rescue. References: 1. Office for National Statistics. “How exactly is employment measured”? March 2009 http://www.statistics.gov.uk/downloads/theme_labour/employment.pdf 2. EconomyWatch. “Unemployment Rates Amongst Countries” http://www.economywatch.com/unemployment/rates-among-countries.html 3. Tutor2U. “Economic costs of Unemployment. ”http://tutor2u.net/economics/content/topics/unemp/costs_of_unemp.htm 4. HRM Guide. “UK Unemployment: Labour Market Statistics”. http://www.hrmguide.co.uk/jobmarket/unemployment.htm Read More