Unemployment And Its Effects On Economic Indicators

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Overview

This paper outlines the macroeconomic indicators and their effects on the general economic status. In particular, the paper explore the economic concepts of unemployment; its effect on the consumer and government expenditure, GDP, Aggregate demand, and economic growth. The paper goes ahead to explore the implications of strict government regulations and labor union policies on future investment economic capacity.

Unemployment and Economic Indicators

According to Keynesians, unemployment is an economic state where people willing and ready to offer their services at the prevailing wage rates and are actively in search of employment opportunities cannot get work. From the Classical Economists’ point of view, market mechanisms are the primary reason behind the rise in unemployment. The relationship between employment and GDP is established by the Okun’s Law which states that a one percent GDP growth leads to a two percent rise in employment and vice-versa (O’Sullivan and Sheffrin, 2003; 332). Therefore, any significant fall in the GDP causes an increase in the level of unemployment in the economy, as established by the forces of demand and supply. Therefore, unemployment negatively impacts on the GDP, hence, the economy in general. On the other hand, unemployment leads to a significant decline in the aggregate demand for goods and services in the economy (Vedder and Gallaway, 1997; 98). This is attributed to the fact that with unemployment, the disposable income of the consumers drops, hence, limiting their consumption and spending. Such a drop in the income power of the consumers further affect the economic growth rate and the GDP in general.

The Australian School of theories is opposed to labor market interventions since they increase the rate of unemployment. According to this school of thought, unionization, minimum wage policy, bureaucratic work rules, and taxation, among other labor union regulations discourages hiring of workers as was the case in Toyota Australia (Romer, 2011; 456). Unfavorable labor union and state regulations on the labor market such as minimum wage and maximum working hours adversely increase the wage bills, thus, increasing the production costs (Romer, 2011; 487-8). This in turn reduces the profitability index of the company, hence, scaring away potential investors.

Change in the business cycle creates unemployment. In particular, cyclical unemployment arises from economic recessions characterized by high production costs and low demand in the economy. This in turn leaves the employers with little alternative but to lay-off some workers, hence, increase in the rate of unemployment. In addition, with the decline in the aggregate demand following harsh economic conditions, the volume of sales are likely to drop, thereby, reducing the revenue generate from the sales (O’Sullivan, and Sheffrin, 2003; 339). Besides, a rise in the rate of unemployment increases government expenditure in compensation and unemployment benefits. The government will have to dig deeper into its spending to accommodate the unemployed persons.

Conclusion

In general, employment plays a critical role in the economic growth and development. For this reason, opposite forces and factors to employment are detrimental to the economic capacity of a country. Like was the case of Toyota Australia, unemployment limited the economic power of the consumers, with the possible consequences being a fall in consumer expenditure, increase in government spending, low economic growth and development, and decline in the productive capacity of the economy.

Bibliography

O’Sullivan, A. and Sheffrin, M. 2003. Economics: Principles in Action. Upper Saddle River, NJ: Pearson Prentice Hall. pp. 330-339.

Romer, D. 2011. “Unemployment”. Advanced Macroeconomics (Fourth ed.). New York: McGraw-Hill. pp. 456–512.

Vedder, R. and Gallaway, L. 1997. Out of Work: Unemployment and Government in the Twentieth-Century America. New York: NYU Press.