And Involuntary Unemployment?? Essay, Research Paper
How clear is the distinction between voluntary and involuntary unemployment??
What might lead to an decrease in voluntary unemployment?Economists divide unemployment into five
broad categories:? frictional
unemployment; structural unemployment; technological unemployment; classical
unemployment; and demand deficient unemployment.? An examination of each of these categories will show that some
are more likely than others to be made up of workers who could work and do
consider themselves part of the labour force, but nevertheless choose, for
whatever reason, to remain unemployed.?
Others will be unlikely to contain the voluntarily unemployed, but will
be made up of those who are unable to find work.? Having examined these categories, we will proceed to draw up two
models of unemployment which show clearly the distinction between voluntary and
involuntary unemployment, and then go on to consider how voluntary unemployment
might be reduced.Frictional employment is caused by short
run changes in the economy, which result in workers moving from one job to
another.? This transition will generally
take time.? If someone is made redundant
it may be some time before they find another job which is vacant, and it is
quite likely that they will not take the first job they come across but will
search for one which best suits their skills and preferences.? It follows that the level of frictional
unemployment in an economy will be heavily affected by the availability of
information regarding the labour market.?
If it is hard to find out about vacancies, it will take a long time for
workers to find a position which is suited to them.? It is also argued that unemployment benefits may have an effect
on frictional unemployment levels, because if benefits are relatively high then
people will feel able to stay out of work for longer and spend more time
searching for an appropriate job.Structural employment is caused by more
long run changes in the economy.? As the
structure of an economy changes, certain workers will find that their skills
are no longer in demand, or that the region in which they live has a lack of
employment opportunities.? An example
might be the British ship building industry, which has contracted to the extent
that workers with skills appropriate to this industry either cannot find jobs
at all or must move around the country to find them.? Structural unemployment will be affected by the cost and
availability of retraining, which would allow people to acquire skills which
will be useful to them in filling the vacancies which are available.? The ease of relocation within the country
will also have an effect on structural employment, since if people are more
free to move around the country they will have more chance of finding a
position which requires their particular skills.Classical employment is the result of the
real wage rate being maintained at an unrealistically high level.? This might occur because a Trade Union has
insisted on a certain wage, even though this wage is not really realistic.? In this case, firms will be inclined to
employ less people because the marginal cost of labour will be too high.? Further, it will become cheaper in real
terms to switch to more capital intensive methods of production, requiring less
labour.Demand deficient, or Keynesian,
unemployment is caused by a lack of demand.?
Keynes advanced the idea, in opposition to the classical model of the
economy, that unemployment had more to do with the goods market than the labour
market.? Low demand in the goods market
would mean low output, and therefore low demand for labour.? Keynes? theory can be shown in two graphs,
the left hand graph showing the state of the labour market and the right the
state of the goods market. Because the aggregate demand schedule AD is
so low, output is only Y2, rather than its long run
At real wage (W/P), unemployment stand at N2-N1.LS=Labour Supply LF=Labour force LD=Labour demand feasible real wage= the limit to the real wage
which the economy can provide. target wage= aspirations of workers. equilibrium position at Y1.? Employment is therefore equal to only
N2.? In this case, the real wage is
almost irrelevant – it could be anything between W1 and W2.From these brief descriptions, we can say
the following about voluntary and involuntary employment.? Friction unemployment will be mostly
involuntary, especially if benefits are low.?
However, it is likely that some people will voluntarily choose to enter
and remain in frictional employment as they search for a better job.? This will be especially the case if benefits
are high, making it less costly to be more demanding in their search.? Structural unemployment, at first glance,
seems likely to be mad
workers cannot control changes in the structure of the economy.? However, some may choose not to take another
job because they feel it is beneath them, or because they do not want to change
what they do.? In this case, the distinction
between voluntary and involuntary employment is blurred somewhat.? Classical unemployment is invariably
involuntary, with employed workers preventing the unemployed from getting jobs
by keeping the real wage artificially high.?
However, as will be shown, the classical model does also include
voluntary unemployment.? Keynesian unemployment
is also involuntary, although again, the model does also contain voluntary
unemployment, as can be seen on the graphs above.One model of the rate of unemployment is
the classical model, which gives the natural rate of unemployment (NRU).? The NRU model can be illustrated thus: ????
This model assumes a competitive labour
market and a competitive goods market, and implies that a large amount of
unemployment is voluntary.? This
implication can be seen from the fact that the total labour force curve and the
labour supply curve converge as real wages rise.? This shows that at a higher real wage more of the labour force
would be prepared to work.? Presumably,
then, they are choosing not to work at the lower real wage levels rather than
being prevented from working.The main alternative to this model is the
non-accelerating inflation rate of unemployment (NAIRU).? This model challenges the classical
assumption that labour markets are perfectly competitive, and instead theorises
that the real wage is determined by negotiation between workers and firms.? The NAIRU can be graphically illustrated
thus:Since high unemployment leads to low demand
in the economy, and therefore low demand for labour, it follows that workers
will aspire to a lower wage when unemployment is high, and a higher wage when
unemployment is low.? At a certain level
of unemployment, the aspirations of workers will be equal to the amount which
firms are prepared to pay, and this level is the NAIRU.? The NAIRU model puts more emphasis on
involuntary unemployment than does the NRU model, because it assumes that there
are people who would work if those who were already working were not keeping
the wage too high to make it profitable for firms to employ more people.This has shown that the distinction between
voluntary and involuntary unemployment is often blurred.? We turn now to examine ways in which
voluntary unemployment might be reduced.?
One answer would be that unemployment benefits should be cut.? This would lead to the frictionally
unemployed having more incentive to cut their search time and to enter
employment as soon as possible.? It
might also lead to the structurally unemployed being more motivated to enter a
job which they would not usually.? For
example, in areas where heavy industry has all but collapsed, workers are often
not prepared to enter light industry, for social reasons or reasons of
preference.? However, lower unemployment
benefits might force them to do this.?
However, this course of action would naturally have very negative
effects on those who were unemployed involuntarily.Another answer might be to make more
training and retraining available at a low cost.? Some people may have weighed up the cost of retraining against
the benefits of re-entering employment and decided that they would rather
remain unemployed.? Perhaps more
training and retraining schemes would overcome this difficulty.? This sort of system has operated with
success in Sweden, where over 2 per cent of the labour force engage in some
sort of retraining each year.As well as simply reducing benefits,
governments could try to make the transition from benefits to paid work more
attractive.? The British Government, for
example, has introduced the ?New Deal?, which hopes to make it easier for the
long-term unemployed to find work.? The
?carrot? of the New Deal is balanced by its ?stick?.? Those who refuse to participate and do not actively seek employment
are penalised through the benefits system.Again, as a complementary move to a
reduction in benefits it would seem sensible to make sure that those who do
find work actually gain from their efforts.?
This means not necessarily ending all benefits as soon as someone enters
work, which has been a cause of voluntary unemployment in the past.? People have found that entering work will
cost them their benefits, and judge that the exchange, which will often give them
only a little more money after tax and NI contributions, is not worth
making.? Schemes which provide
continuing support for the newly employed might help to encourage people into
work.