Unemployment entails a situation whereby a section of people in an economy’s work force who have the capacity and the will to work but they lack jobs. It is expressed as a percentage of an entire work force. It is calculated as a ratio of the number of unemployed people to the total labor force in an economy. The work force comprises of people have the capacity and are willing to work. Some groups of people excluded from labor force include those who are disabled, retired, as well as those who are able to work but they are not actively looking for any employment opportunity (Diamond, 2013). The last group may entail those who are still going to college and the ones taking care of children. The government determines the current number of unemployed people through a survey known as Current Population Survey which is conducted monthly.
Causes of Unemployment
The unemployed people are defined as the ones who want to work and have been actively sought employment for the past one month. There are various reasons that cause unemployment in an economy. Some of the causes include the following.
§ Quitting jobs to look for new ones. Frictional unemployment is caused in this manner.
§ Voluntary will not work leading to voluntary unemployment when a person fails to find a job that meets his or her expectations.
§ Layoffs by companies and failing to rehire the laid off employees.
§ Companies reducing the work force hence forcing the laid off employees to seek new positions. This cause is usually due to local conditions such as closure of company division or plant, or national conditions such economic slowdown that forces several companies to cut down on the work force. Economic recessions are the primary cause for this scenario and leads to what is referred to as cyclical unemployment which tend to disappear once the economy recovers.
§ Return of some people to the labor force from such conditions as attending college or pregnancy and hence they are still looking for positions in the labor market.
§ Technology replacing human labor hence rendering them jobless.
§ Certain skills going down and losing some relevancy in the labor market. As a result, the positions available for people with such skills become limited hence rendering many of them unemployed and forcing them to train for new positions. Structural unemployment is caused in this manner.
§ Government interferences to the labor market through such things as setting taxes and price ceilings that may force businesses to cut down on the labor force to avoid financial losses. Such interferences causes institutional unemployment.
Impacts of Unemployment
Unemployment affects both individuals and the nation at large. The condition is stressful at a personal level since it reduces one’s level of income or they lack income completely especially those who don’t have unemployment insurance cover (Diamond, 2013). The period of job hunting is quite challenging because of the financial setbacks that an individual has to go through and many other hassles. A prolonged time of job hunting can plunge someone into deep financial troubles as it means exhausting savings and other resources.
From a national point of view, some forms of unemployment are anticipated and desirable especially when individual quit their current positions to search for new ones. When there are some people without jobs, it implies that employers can hire quickly to feel vacant positions without creating vacancies in other companies that need to be filled. On the other hand, when the unemployment rate is too high, there would be an escalation in the overall spending by the economy. Such a case can force businesses to lay off their employees and consequently reduce their spending hence which can ultimately lead to recession.
Relationship between Demand and Supply of Labor and Corresponding Wages
Figure 1: Demand and Supply of labor in relation to the level of wage
Figure 1 above shows that the supply of labor force is directly proportional to the level of wages. The implication is that many people are willing to work when payments for jobs are high. On the other hand, demand for labor force is indirectly proportional to wage levels. When the wage levels are high, employers are willing to employ only a few people and the opposite is also true. When all other factors are constant, the demand and supply of labor force sets the equilibrium point for wages. In the figure 1 above, WE and LE are the equilibrium wages and labor force respectively, as set by the two forces. Unemployment is high during recessions as the demand for labor normally falls. The effect of such a fall can be illustrated according to the classical model for smooth labor market as well as and Classical-Keynesian model that entails sticky wages as shown in the following diagrams.
Figure 2: Effect of recession according to the classical model of smoothly operating labor markets
As shown in the figure, the equilibrium wages falls to W2. The resultant quantity supplied and quantity demanded equals at L2. According to this model, an equilibrium situation is achieved with no unemployment.
Figure 3: Effect of recession according to the Classical-Keynesian model entailing sticky wages
The figure shows that the wage stays at its original level, W* since it is “sticky”. There is a drop in the quantity of labor demanded to LD as the quantity of labor supplied stays at LS. This model illustrates unemployment as indicated by the shaded part between LS
and LD.
Case study: Unemployment in Germany
Germany supports its unemployed persons through the regulations of the Third Volume of the Social Code (SGB III) (Fitzenberger and Wilke, 2010). The Code contains several things including the legislations on unemployment benefits eligibility. The benefits forms a section of the social security to improve the distribution of income and raise the living standards for the general population. The SGB III distinguishes various groups of people such as those in or not employment, re-entrants in the job market, jobseekers, the disabled persons, and the unemployed individuals. The SBG III defines these groups of people as follows.
A person is considered not in employment, “if one is not employed or is employed for less than 15 hours per week, and is searching for employment of at least 15 hours with compulsory social insurance contributions” (Kruppe et al. 2007, p.7). This implies that such an individual is willing to attempt all possibilities of ending the period of lacking a job. Such possibilities include being available for placements by the Federal Employment Service. It is through such availability to work that a person is defined as capable and willing to work and take up any reasonable employment opportunity under standard conditions.
According to the SBG III, jobseekers are people who are looking for employment for a period of at least 7 calendar days both at home and abroad. These people are required to register for placements at the Federal Employment Service. They must also be capable and have the professional and legal qualifications to pursue their achieved occupations and reside in Germany. Unemployed people on the other hand, are the jobseekers who are not in employment temporarily but are looking for positions. They are supposed to registered at the Federal Employment Service and be entitled to the compulsory social insurance contributions. The definition for the unemployed people also includes those who do get benefits of unemployment. However, the criteria used to receive these benefits is not sufficient to consider an individual as unemployed, especially for the case of individuals who unable to take up work due to illness of up to six weeks.
Form the above definitions, the following are the implications of people who are not regarded as unemployed:
§ Those who are marginally employed, that is, they work for more than 15 hours per week.
§ The ones not allowed or not capable of working especially the young people below the age of 16 years.
§ Individuals who are not registered with the Federal Employment Service, never turn up again for more than three months, or the ones who do not keep appointments on several occasions without any valid reason.
§ The ones who residents only in foreign countries.
§ Individuals who are unable to work due to illness that lasts at least six weeks.
§ Persons engaged compulsory or military services or they are arrested.
§ School leavers or students who are searching only for professional trainings.
§ Foreigners who don’t have the compulsory work permit as well as their family members particularly if the labor market is not open for them.
§ Persons on leave, including the parental leave.
§ People who work only for a short durations including zero working hours.
§ The elderly people who are 58 years and above but cannot fulfill the unemployment definition in the sense that their state of not willing to accept all the possibilities of ending the period of lacking a job or they cannot take up jobs immediately.
The German government requires all unemployed persons receiving benefits to personally renew their registrations every three months. Failure to comply with this requirements leads to automatic deregistration. Exemptions are only extended to those over the age of 55 years as well as workers that are hard to place (Kruppe et al. 2007, p.9). One of the impacts of this regulation is the reduction of long-term unemployment caused by short interruptions that happen in case of late renewal. The concept of reasonable employment has been redefined. Formerly, the concept was defined to imply the occupation which the unemployed person was qualified for as well as the previous net wage before the unemployment. Currently, any work is considered reasonable employment as long it is within the legal bounds. This new definition has led to downward displacements in filling of vacancies whereby individuals easily move from more to less qualified jobs. Therefore, the structure of the credentials of the unemployed persons have also change in a manner that those with lower qualifications have risk a high chance of becoming and remaining unemployed.
All registered unemployed persons are obliged to look for jobs on their own. The Federal Employment Service is mandated to request evidence of active job hunt such as participations in interviews with firms, reading of newspapers, or letters of job applications. If a person cannot provide such evidence then one stands to be excluded from registered unemployed membership and hence could be excluded from receiving unemployment benefits. Training measures are explicitly used to gauge the capability, willingness, and readiness of an individual to take up a job.
The rate of unemployment has for a long time been calculated as a fraction of the unemployed civilians to the entire German’s labor force. Today, an international comparable form that uses the whole labor force as a reference is reported in the overall rates (Fitzenberger and Wilke, 2010). However, rates on specific categories of the work force still exist in relation to civilian labor force. Monthly data on employment and unemployment is computed by the insurance on social security. However, estimating the general employment level is renewed annually by the Statistical Office of Germany and is usually barely accurate. Bringing together different sources of national data helps the Statistical Office to correct their estimates regarding the overall employment as the case of what happened in 2006.
The definition of a person considered as unemployed was expanded to include any person who is capable and in needy from the household perspective (Kruppe et al. 2007, p.10). This definition includes the concepts of hidden unemployment, labor reserve, discouraged workers as well as hidden work force. Contrasting the previous legislation, the current definition considers any needy person who wants social benefits as unemployed especially if such an individual is capable of working for at least three hours in a day. The changes in legislation have brought statistical impacts on the computation of unemployment statistics which significant increased since the introduction of the changes.
Addressing Unemployment
Even though creation of job opportunities is a universal goal, there are several challenges in dealing with unemployment. Governments partly create employment, but their functions are significant in sustaining job creation (Beranek and Kamerschen, 2010). Private sectors have a higher responsibility in creating jobs than the government, but the quality of civil service offered by the government plays a crucial in the development an economy and sustaining of jobs created by these sectors.
There are several principles which can be used to solve the problem of unemployment. They include the following:
§ Accelerating job creating efforts to sustain economic recovery as well as future growth. This principle is much helpful particularly to countries that are recovering from a financial crisis.
§ Strengthening social protections and promoting policies for inclusive labor markets. These efforts aim at helping the disadvantaged groups in the society as they may take too long to recover even when the rest of the society picks up from an economic meltdown.
§ Focus on improving the quality of jobs by respecting the fundamental rights regarding labor.
§ Preparing workforces for future opportunities and challenges to avoid cases of structural unemployment.
§ Economic strategies at a national and global level should prioritize alleviation of poverty and creation of employment.
References
Beranek, W. and Kamerschen, D. (2010). Unemployment Benefits and Unemployment. SSRN Electronic Journal.
Diamond, P. (2013). Cyclical Unemployment, Structural Unemployment. SSRN Electronic Journal.
Fitzenberger, B. and Wilke, R. (2010). New Insights into Unemployment Duration and Post Unemployment Earnings in Germany*. Oxford Bulletin of Economics and Statistics, 72(6), pp.794-826.
Kruppe, T., Müller, E., Wichert, L. and Wilke, R. (2007). On the Definition of Unemployment and its Implementation in Register Data - The Case of Germany. SSRN Electronic Journal, pp.1-34.
