Describe about the Macroeconomics for Theory of Unemployment.
The article discusses the recovery of Japan’s economy after the recession in the first quarter of the year 2015. The Gross Domestic Product has increased by 0.4% in the first quarter i.e. during the period between January to March and annually 1.7% The rise in the GDP was mainly due to the boost in consumer expenditure and partly also due to the rise in production due to the addition of one more day in the leap year. The government of Japan has been trying to recover the economy from the recession since long. However, at the starting of 2015, the equity market was falling and , Japan’s currency, Yen, value has decreased in the foreign market which has made the industry lose their profit. Under the circumstances, the imposition of consumption tax has been delayed by the government as it will lead to further curbing of consumption and will reduce Gross Domestic Product (Warner 2015).
The plan to impose consumption tax followed from last year’s rise in consumption tax to raise revenue of the government so that it can help in the payment of huge public debt. This consumption tax in 2014 was considered as a reason to for recession and so government has hold the levying of tax in the first quarter of 2015 to recover it from recession by boosting consumption. However, there is a requirement of some prudent policies by the government to get finance to pay public debt (Warner 2015).
The Japan economy is going through a tough situation as Yen value is falling and the customers are losing the confidence in the currency. The economy requires a kick start or a push to come out of recession. This has made the government of Japan to take some prudent steps by planning to hike the government spending, easing the control on money supply by the central bank of Japan and to take certain positive reforms to regulate the economy.
The steps taken by the government has made Yen cheaper and boosted the exports of Japan. Rise in export has increased the inflow of foreign currency and thus improved the economy situation by raising the demand for its product. The earnings of the exporters has increased but to have sustained growth, mush better deep rooted policy implementation is required. The monetary policy of the Bank of Japan was modified to take the country out of deflation. Further, the government has reduced the interest rate to encourage investment and boost the business of the country. The effects of the policy change was seeing in rising demand for durable goods, however, there has not been much change in the GDP figures due to the changes made in the monetary policy. The investment is not increasing despite the reduction in interest rate. Even a warning has been given by the International Monetary Fund about the little impact of the change and control of inflation rate (Warner 2015).
The GDP or the Gross Domestic Product is defined as the sum total of all final goods and services produced within the geographical boundary of the country. It is obtained by addition the total consumption expenditure of the people and the government, investment expenditure of the private and public sector and net exports of the economy. Changes in any one of the variables, affect the Gross Domestic Product of an economy. It can be given as follows
GDP = C + I + G + (X – M)
Where C – consumption expenditure of the consumers
I – Investment expenditure of private and public sector
G – Government consumption expenditure
X – Export of the country
M – Import of the country
If government wants to increase or decrease GDP, then it can be done by changing any one of the variable on the right hand side. To push the economy out of recession, the government of Japan is following the policy of changing the variables on the right hand side of the equations to bring changes in GDP. The reduction of consumption tax should have increased consumption and further increase GDP. But there was not much of the rise in GDP. Further exports have increased, due to the fall in the currency value so GDP has a positive impact. But import has also increased as the prices have increased so the import bill is rising. Hence the change in net export depends on which one is greater (Warner et al. 2015).
In Japan, it has been seen that despite the rise in consumption expenditure, there was not much rise in GDP. This may be due the negative impact from net export. It may happen that the negative impact of net export outweighs the positive impact of consumption expenditure. Hence ultimately, the change in GDP is minimal.
Further, the interest rate was reduced by the central bank to increase private and public investment in the equation, so that GDP increases. However, it was seen in Japan that investment did not increased by the expected amount. The reason may be other factors affecting the investment expenditure of the country, such as political stability, licensing norms of a country, easy access to foreign direct investment in a country and other areas which indirectly affects the investment (Kubiszewski et al. 2013).
The circular flow money in an economy shows the flow of money from the product market to the factor market and from the consumers to the producers and vice-versa. It can be show below
Figure 1: Circular flow of Money in a closed economy
(Source: Woodbury and Davidson 2012)
The circular flow of money shows the movement of income between the firm and household takes place through factor market and goods and service market. What is invested by the producers is the income of the labourers who are employed their and what is spend by the household is the earnings of the business (Wray 2015).
In case of recession government need to boost this flow and take policy that increase the circular flow between business and household. The higher is the flow, more is the transactions between the sectors and economy grows and pushes the economy from recession to boom period. However there are three different methods of finding Gross Domestic Product, Income method, expenditure method and product method. The methods may be different but he result is same. Calculation of Gross domestic product is a tedious task and it is generally run on the computer (Warner et al.2015).
The monetary policy is designed by the governing authority of Reserve Bank of India. The interest rate was reduced which should increase the investment. As invested amount did not increase, so the employment and income is also not increasing. Fiscal policy refers to the reduction or imposition of taxes, subsidies and other control system. In the case study, fiscal policy of the government was to reduce consumption tax, so income must increase. But in reality it is not increasing, the reason may be some non-economic factors which need not be discussed (Tucker 2016).
Government of Japan need to take serious step to push the economy out of the recession. Any failure of the step moves the economy back to the recession. The recession is a period of concern for any economy. Government of Japan has designed another policy to cover the loopholes of the economy for growth and development (Sylos 2013)
The failure of monetary policy indicates that reduction of interest rate will not help to boost economy and then what is required is proper planning of the government to push the growth rate up. The investment is negatively related rate of interest. If rate of interest decreases, investment must increase and vice-versa. However, if savings are not increased, the supply of loanable fund does not increase and excess demand gets created in the market. Due to the rise in demand for loanable fund, again market interest rate rises and this is the short run phenomenon. Again the interest falls and investment increases (Storm and Naastepad 2012).
As the government of Japan is unable to control recession, some steps are suggested here. Government should increase income generation of the economy by increasing production. As this will lead to increase in employment and hence increase in income. The government should further make investment for infrastructure development, it will again increase labour demand and employment gets generated. Hence lead to increase in income. The increase in income through indirect investment can push the economy out of recession and bring sustainable growth in the country with stable market variables like gross domestic product, investment in public and private, consumption expenditures of government and consumers and net exports. Hence, when direct method fails, indirect method should be adopted to push the economy out of recession. The exchange rate value of currency should be controlled by the central bank and fluctuation should not be allowed as it will lead to unstable economic variable (Smithin 2013).
Article 2: Jobless claims hit 294,000 vs. 270,000 estimates
(Source: cnbc.com/2016/05/12/us-weekly-jobless-claims 2016).
The article discusses the unemployment situation of America which rose to the highest level recently and drew concern about the labour market due to fall in the availability of jobs. The unemployment benefit given by the state rose by 20,000, making the benefit to 294,000 from 270,000 in a week time .It was the highest amount given for unemployment till date in USA. The analysis from the labour department ascertains that ot was the highest claim for unemployment till date and it was mainly from New York and Michigan city (Pigou 2013).
The labour market of America was vigorous despite of the fall in economic growth The rise in unemployment was may be due to seasonal fluctuations of job market in the 1st quarter of the year. The record has shown the number of job openings was the highest in last year even during the after-recession period (Nicholson et al. 2014).
The major indicators of labour market are unemployment rate, labour force participation and employment-to-population ratio. The unemployment rate indicates the percentage of unemployed people in the economy and is obtained by the formula
Unemployment rate = (No. of people unemployed / Labour force) * 100
where labour force is the summation of number of people employed and number of people unemployed. The employment-to-population ratio indicates the percentage of working people who have jobs. It is obtained by the formula (Mankiw 2014)
Employment to population ratio = (No. of people employed / working age population) *100
It helps to understand the availability of jobs and the match between the skill of the labour and the required skill of the jobs. The labour force participation ratio gives the percentage of the working age population those are the members of the labour force and is obtained by the formula (Luo 2015)
Labour force participation rate = (Labour force / working age population) * 100
The three indicators help to understand the labour market. In America, the rise in the claims for unemployed people does indicate that the condition of labour market is deteriorating. It may be a temporary situation due to increase in seasonal and frictional unemployment rate (Labini 2013).
There is another concept of underutilized labour force which refers to the underemployed and marginally attached labourers. The unemployed labour is the person who has job but is not satisfied with the job and it is below its skill level. He is available for more work but not getting work. On the other hand, the marginally attached workers is a person who is discouraged by the labour market and is available for job but not searching for job presently due to the repeated failure of getting the job in the past. He is totally frustrated and dis-motivated to get the job. The calculation of unemployment rate does not consider these two concept of labour force (Hendry 2016)
If the marginally attached labour force and under-utilized labour force is added in the calculation of official unemployment rate then, the results may vary in the American market of labour force (Frydman and Phelps 2013).
Further, there are concepts called full employment or natural rate of unemployment, frictional unemployment, cyclical unemployment rate and structural unemployment rate. The concept of full employment rate refers to a situation where all the available resources I the economy is fully utilized and there is no resources left out for further utilization. However, this is a hypothetical situation and it is argued that at any point of time there are some people who will always remain unemployed due to several reasons, such as nature of job, requirement of work, health conditions etc. Hence the full employment situation is the situation of natural unemployment (Frydman and Goldberg 2013).
Further the frictional unemployment refers to the situation of unemployment when a person changes his or her job. During the shift from one job to another, for a certain time period the person remains unemployed. This section of the population falls under frictional unemployment rate. The cyclical unemployment situation refers to the seasonal unemployment that arises in a business cycle of an organization. For example, during recession time, the availability of job is less and during boom period, the availability of job is more. People, who are employed during the boom period, may remain unemployed during the recession, leading to frictional unemployment situation (Davidson 2015).
Structural unemployment arises due to the change in the structure of the economy. For example due to the increasing adoption of high technological solutions by the organization reduces the demand for physical labour force. Here unemployment has been caused due to the changing technology from labour intensive to capital intensive. Hence, it is due to the changing structure of working conditions and is termed as structural unemployment (Brückner and Pappa 2012).
In United States the surge in the unemployment claims shows an increase in unemployment rate in a particular quarter of production. However, in the previous quarter of production there was increasing need of workers for job. Such a situation clearly indicates the existence of cyclical unemployment in the economy which rises due to seasonal changes in the job requirements of the organization. It can also be due to the changing phase of jobs by a number of labour force leading to frictional unemployment which is again a temporary phenomenon. Further, the existence of difference in the unemployment rate between the movement from one quarter to another quarter is may be due to the changing structural of the labour market and the economy which is called as structural unemployment .Hence, the surge in unemployment in America is a temporary situation and may only last in the short-run. Thus the economy should not be worry about such short run phenomenon which will get resolved by itself with changing situations in the labour market (Betts 2016).
The relation between real GDP and unemployment is discussed here to understand the present situation of America. The amount of real GDP at the level of full employment is called the potential GDP. The gap between the real GDP and potential GDP is called as output gap.. During the business cycle, the output gap fluctuate which results in the fluctuation of unemployment rate around the natural rate of unemployment. When the economy is at full employment rate, the unemployment rate and natural rate of unemployment is same and the real GDP is same as potential GDP. When unemployment rate is greater than natural rate of unemployment, it means real GDP is less than potential GDP and the output gap is negative. Further, when unemployment rate is less than natural rate of unemployment it means real GDP is greater than potential GDP and output gap is positive (Battaglini and Coate 2015).
The differences in the output gap may cause temporary unemployment situation and in American labour market, the similar situation must have aroused which will automatically get dissolved with the time frame. So it is not a matter of severe concern that there exists increase in unemployment claims from one quarter of production to another quarter of production (Argy and Nevile 2016).
Again, the unexpected inflation in the country influences the real GDP and employment rate of a country. If there is unexpected inflation in a country then it leads to rise in the profit of the firm which further increases investment and results in a boom in production and employment. Under the situation, real GDP will rise over the potential GDP and unemployment rate will decrease below the natural rate of unemployment. However this is a short term phenomena and when the economy comes back to normal situation, unemployment rate rises. Similar situation may happen during fall in price or deflation. When there is deflation in an economy, price falls that lead to fall in profit of the firms and so they invest less which further reduces the employment , income and production. Under the situation, the real GDP will fall below the potential GDP and unemployment rate will increase above the natural rate of unemployment rate. Again, this is a temporary phenomenon and does not last for long period and when the economy comes back to normal situation then there may be fall in unemployment rate (Argy 2013).
In America, the similar situation must have happened which has shown a surge in unemployment rate which is actually a short run phenomenon and will not hamper the economy in long run. Thus the changes in unemployment rate due to the movement of production from one quarter to another quarter can be analysed in various ways such as from the different concepts of unemployment rate, from the relation between various types of unemployment rate and from the relation between GDP and unemployment rate, from the relation between inflation and unemployment rate and lastly from the concept of output gap and real and potential GDP (Alonso and Sorolla 2015).
References
Alonso Rodriguez, R. and Sorolla, V., 2015. Classical versus Keynesian theory of unemployment.
Argy, V., 2013. International macroeconomics: theory and policy. Routledge.
Argy, V.E. and Nevile, J. eds., 2016. Inflation and Unemployment: Theory, Experience and Policy Making. Routledge.
Battaglini, M. and Coate, S., 2015. A political economy theory of fiscal policy and unemployment. Journal of the European Economic Association.
Betts, D.C., 2016. DEPARTMENT OF ECONOMICS INTERMEDIATE MACROECONOMICS Spring 2016.
Brückner, M. and Pappa, E., 2012. FISCAL EXPANSIONS, UNEMPLOYMENT, AND LABOR FORCE PARTICIPATION: THEORY AND EVIDENCE*. International Economic Review, 53(4), pp.1205-1228.
CNBC. (2016). Jobless claims rise to more than one-year high. [online] Available at: https://www.cnbc.com/2016/05/12/us-weekly-jobless-claims-apr-7-2016.html [Accessed 28 May 2016].
Davidson, P., 2015. Full Employment, Open Economy Macroeconomics, and Keynes’ General Theory: Does the Swan Diagram Suffice?. Institute for New Economic Thinking Working Paper Series, (35).
Frydman, R. and Goldberg, M.D., 2013. The imperfect knowledge imperative in modern macroeconomics and finance theory. Rethinking expectations: The way forward for macroeconomics, pp.130-168.
Frydman, R. and Phelps, E.S., 2013. Rethinking expectations: The way forward for macroeconomics. Princeton University Press.
Hendry, D., 2016. Deciding Between Alternative Approaches In Macroeconomics (No. 778).
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Labini, P.S., 2013. The theory of unemployment, too, is historically conditioned. PSL Quarterly Review, 40(163).
Luo, J., 2015. A Theory of Unemployment and Unhappiness: The Fixed Cost of Living and Its Applications. Available at SSRN 2673308.
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Yahoo Finance. 2016. Japan economy returns to growth in Q1, avoids recession. [online] Available at: https://finance.yahoo.com/news/japan-economy-avoids-recession-0-4-growth-q1-011527074.html [Accessed 28 May 2016].
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