Unemployment Theories and European Unemployment

Unemployment Theories and European Unemployment

Contents        

1.        Introduction        

2.        Theories of Unemployment        

2.1 Classical Economic Theory        

2.2 Keynesian Theory        

2.3 Marxian Theory        

2.4 Monetarist Theory        

3.        European unemployment        

4.        Best Describing Theory of Unemployment the unemployment in European countries        

5.        Conclusion        

6.        References        

1. Introduction

Unemployment means the state of being unemployed. Economically, it can be defined as a fall in gross domestic product. Many countries, whether it is developed country or developing country have experienced high rates of unemployment during recession period. According to International Labor Organization report, in 2012, more than 100 million people were unemployed all over the world. There has always been a debate about the causes and consequences of unemployment and the possible solution to eradicate it. Many theories have been proposed to explain the unemployment problem. Mark Blaug (1991) described the Theory of Unemployment as “highly abstract and profoundly obscure”.

1. Theories of Unemployment

2.1 Classical Economic Theory

According to classical theory, the labor market represents demand and supply of labor (Pigou, 1933; Solow, 1981). As per the classical theory, the labor market is supposed to be a single market; it works solely and has no dynamic factor (Ackerman, Goodwin, Nelson, Weisskopf, & Institute, 2013). In this market, it is not the quantity of goods that matters but the quantity of labor services. The supply of labor describes their will to work. They can accept or reject the real wages. If the wages increases supply of labor increases but the demand of labor decreases. Therefore, at equilibrium demand and supply of labor intersects each other and there is no unemployment. At this point anyone who agrees to the wages can have the job and there will be no involuntary unemployment.

The concept of minimum wages can shake the otherwise perfectly smooth market. The enforcement of minimum wages increases the wages of labors. The less skilled labors who want to work at the market wages cannot find work because the wages exceeds their skills. This causes unemployment. It is considered that whenever the government tries to interfere in the economy to improve conditions, unemployment increases. Therefore, according to the classical approach, the economy should be left undisturbed.

2.2 Keynesian Theory

According to classical theory, full employment can be maintained by cutting the wages. But Keynesian theory argues over that. Keynes said that, “The best way to destroy the capitalist system was to debauch the currency” (Skidelsky, 1992). According to Keynes, it is unlikely to reduce the wages to increase employment. The people who are employed themselves make sure that the wages don’t fall below a line. The workers resist the fall in wages by every possible means so that the employer cannot hire a lower priced “outsider” (Ackerman, Goodwin, Nelson, Weisskopf, & Institute, 2013). Further if the wages are reduced consumer spending will also reduce. As a result, the demand for product will also reduce which causes decline in production. All these things make the situation even worse as the consumer spending and product demand goes down even more.

The only possible solution left to recover is to increase spending on the products. This will increase the production which compels the employer to hire more workers. The employer will need to increase their employee’s income so that they can spend more and the economy is balanced. This will cause further increase in production and the economy rises.

Classical theory states that the labor market should not be interfered by the government. The labor market can balance itself. But Keynes thought that, government should interfere in the economy for the benefit of later. Government lessens the prices of goods and services, so that it becomes more affordable. This will increase the demand of the product and consumer spending.

2.3 Marxian Theory

According to Marx, the unstable capitalist system increases the unemployment. Unemployment as we all thought is not profitable because it does not increase profits. But giving it a second thought we can realize that unemployment is profitable as it lowers the wages in global market. The workers fight amongst each other to get the job even at lower wages. Marx proposed to annihilate the system of capitalism and forced competition for wages. This is the only way to eradicate unemployment (Marx, 2010).

2.4 Monetarist Theory

According to Monetary theory, money supply can be controlled by controlling the inflation. Monetary theory assumes that the economic decisions of workers are based on their real wages. If they have been told to give extra time on work, they will but if they know that the real wages are not increasing, they will refuse to work anymore. The employers cannot increase the production if the production cost increases with the rate similar to the rate of selling.

Freidman proposed that if the inflation expectations are constant, equilibrium between unemployment rate and inflation can be maintained. The theory can be explained as, if the demand increases, the production will increase.  The workers are unaware about the inflation and they will continue to work on the previous wages. This decreases the production cause and result in increase in profit.  The employers need to hire more workers and thus the unemployment reduces. However, the trade-off between unemployment and inflation is temporary.