J5 – The Problem of Unemployment [To be marked]

18 01 2011

The Great Recession. An economic event whose very name strikes horror and fear in the heart. The great monster that ravaged the streets of London and destroyed the roads of Stockholm. It did not simply just come and go. It left tracks, one of which is the cause of much sorrow to the average Canadian: Unemployment. That being said, what should governments, who are viewed as saviours and guardians of society, do to clean up this huge footprint? Or should they do nothing at all?

First, we should realize that all forms of unemployment are not equal. In fact, a certain amount of people (6% to 7% in Canada) searching for work is actually expected in a free market economy and is considered healthy. For example, frictional unemployment, people moving from one job to another, is a great indicator of growth as people upgrade jobs and structural unemployment, from shutdowns of sectors in the economy which are not in demand currently, shows an increase in modernization and innovation and an economy facing the future, competing with the wider, developed/developing world. The form of unemployment that is dangerous though is cyclic unemployment which is the result of  falls in the business cycle. People loose their jobs, loose hope, and need sustenance.

I believe that governments should do something about this form of unemployment. Leaving the free market to fix these problems is inefficient – the free market has no incentives to  help its losers. In fact, left on their own, the unemployed may create further complications and negative externalities for society such as increased crime rates and a drag on family and friends, not to mention all the lost tax revenue that could have been collected, all of which could be prevented if the government steps in and helps these people out. Also, it is well-accepted that a government has a responsibility to help its citizens by protecting their physical safety.  But what is often forgotten is that economic safety is just as important! Failing economically has many negative side-effects, harming both your wallet and your physical body, as one editorial in The Nation professes. Is it not also morally wrong just to leave your fellow countrymen on the sidelines while you look on? All reasons combined, governments should step in and do something. But what?…

Well, since cyclic unemployment is caused by fluctuations in the economy, it would make sense to first try increasing economic growth and output (GDP) to help increase the number of employed. The government can try and use fiscal policy to their advantage and help increase governement spending (themselves), consumer spending, business investment, and net exports – the prime components of the GDP which ultimately shifts aggregate demand right. They can do this by decreasing taxes and increasing spending, hoping that the consumer wealth they provide by employing people and removing less of their money would be poured into businesses which would hire more and can bring the economy back up to speed, in a continuous, multiplying cycle. Though this is very effective, it does not completely solve the problem because increases in GDP are not always correlated to employment. In fact, there is often a disconnect between national output and “official” unemployment rates (you are not counted if you give up the hunt, etc) and the day to day lives of Canadians, as shown in this Toronto Star article on current unemployment. So enough with those charts and figures – how do you get  people back to work?

Well, since they are unemployed the governement should try to maximize their ability to look for a job and focus on that task. They should, and are, giving people employment insurance (part of government transfers) so that people can live their daily lives (eat, sleep, bathe) without the fear of poverty behind their backs. This way they can focus on searching for a job rather than just staying alive. Thus, the first step in decreasing unemployment and helping the unemployed would be extending EI benefits. We should not get complacent with our GDP numbers. Clearly, the jobless are as shipwrecked as ever, regardless of the “dipping” jobless rate. Another thing that they can do is help buff up the skills of long-unemployed workers by investing in retraining/training programs. Let’s see what Narayana Kocherlakota, president of the Federal Reserve Bank of Minneapolis, has to say:

“It is unprecedented in post–World War II U.S. history to have 3% of the labor force unemployed for over a year.”

Clearly, we need to put people back on their feet.

To created sustainable growth, indicated by an upward trend in the business cycle, we need to invest in the future. Investing in both people and ideas. According to the CBC documentary linked to earlier, youth are one of the most left-out groups in the economic growth Canada is experiencing – but they are the future! To remain competitive with future generations of other  countries, we need to give our youth jobs to give them experience and a bit of money. The government should concentrate a large portion of its recession spending on jobs that youth – the future generation – can take part in. To create the economy of the future, the government should also create hiring incentives for new and emerging fields like renewable technology. This way, we can lead the world and form a competitive advantage. With the advent of free trade, this is extremely important. If we are left with old, decaying, uncompetitive fields, whose fault is it but our own?

Finally, to clean up, hiring incentives should also be placed in industries that have been hurt in the recession. Industries like manufacutring need to be massaged so that former employees are back at work – we have a moral responsibility to them.

In conclusion, governments really should help the unemployed get back to meaningful work. Though it is expensive in the short run, in the long run you will do two things. Decrease unemployment and create sustained growth (shifting LRAS right). Not bad. Not bad at all. 🙂



One response

19 01 2011
Abdiwahab ISP « The Blog for WLMac Economics

[…] J5 – Unemployment […]

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