Perspectives on Unemployment - Case Study Example

Perspectives on Unemployment University Affiliation Name Perspectives on Unemployment Unemployment has been singled out as one of the crises that worry the UK government. Economic Review and Hürriyet Daily News cite John Philpott of the Chartered Institute for Personal and Development (CIPD) on this subject. He states that the government is wary of unemployment going beyond the three- million mark in the near future. It is estimated that unemployment will reach 2.9 million by mid-2012. The paper cites the UK Office of National Statistics (ONS) published on 16th March, 2012 that shows that the trends of the youth unemployment are a cause for alarm. According to the report, the unemployment among the youth in the (16 - 24) age bracket is at 20.6%. The ONS report, however, notes that this should not present a cause for panic – something experts seem to disagree with. According to Vesterbye, analysts and economic experts are concerned that high unemployment rates would dent the government’s credibility, stagger investment flows and fundamentally change the government spending policy. It has also been noted that that the two recent economic recessions have led to severely high levels of unemployment that pose a serious problem for the policymaker’s world over (Margetts). The BBC reported in May 2011quoted the Work and Pensions Secretary Mr. smith describing the job situation as “the scandal of the highest level of youth unemployment the UK has seen modern times”.1 Previously in December 2009, The Telegraph quoted the then Chancellor Mr. Darling saying, “Unemployment in the UK will keep rising for some time and promoting employment remains a top priority for the Government.”1 It is against this background that this paper looks at the UK government policy for unemployment from the Keynesian and the neo-liberalism perspectives. The government policy for unemployment The UK government’s policy for unemployment, for the last fifteen, years is generally moving towards developing a flexible labor market in which the real wage is controlled by the market forces of demand and supply. A critical look at the UK government policies in the last two fiscal years (2010 and 2011) reveals that the unemployment policies (as outlined in the respective budgetary proposals) targets two broad areas namely: training and incentives for growth. On training or employment skills, Mr. Darling outlined the government policy that provides financial assistance for 10, 000 internships in the areas of industry and professionals. Also confirmed were plans to train and further educate every school leaving 16 and 17-year olds in September 2010.2 The 2011 budget prepared by Mr. Clegg factors in the increment of funding for new university, technical colleges and vocational training from 12 colleges earlier planned to 24. 3This policy is nevertheless challenged by Sean Figg of the Youth Fight for Jobs.4 Figg feels that there is nothing to suggest that training will translate to real jobs. He suggests that training schemes could be used by employers to force the youth to work for free or they may be exploited for cheap labor. The economic growth incentives are directed towards increasing exports and creating conducive environment for job creation through an enhanced private sector. This is outlined in a press statement by Mr. Chris Grayling the minister of state, Department for Work and Pensions. These policies are hoped to increase jobs in the private as well as replacing the public sector jobs. The year 2011 UK government budget for instance factors in new export credit packages for manufacturers, a new centre for technology and innovation and 9 new university campuses. Expert opinion however faults the government’s commitment to private sector growth. According to economists like Shehan Mohamed of CEBR, the rise of the VAT from 17 to 20 percent and limited access to credit are disincentives for the private sector growth. They affect its capacity to recruit new workers. Mr. Philpott also cautions that it is dangerous for the government policy to rely on unpredictable financial markets5. Political and economic perspectives The UK government approach to the unemployment crisis is twofold in policy and perspective. It embraces both public involvement (for example in education and training of the unemployed youth) and liberalizing the economy (by fostering the private sector investment and growth). These two approaches loosely fit the Keynesian and the neo-liberalism perspectives to unemployment. The Keynesian Perspective Keynes in The general theory of employment, interest and money policy posits that the level of unemployment is dictated by the level of aggregate demand for goods and services in an economy. To Keynes, high unemployment levels imply demand-deficiency. High growth rate creates high aggregate demand and subsequently low unemployment. Albo illustrates this by examining the golden age (1966-1973) when full employment was attained with countries like Japan and Germany experiencing job shortages. According to Albo, Keynesian perspective views capitalist economies to be the main cause of unemployment. In these economies real wages tend not to fall, declining interest rates prevent capitalists from investing thereby causing a lack of effective demand. Consequently, potential workers are forced out of employment. Optimal employment can only be achieved by practices that raise the level of effective demand. Such factors include increment in investments, rise in public and private consumption or enhanced exports. Governments should adopt policies that will effectively deal with the Keynesian type unemployment Margetts suggests a number of measures available to governments for addressing Keynesian unemployment. Increased government expenditure in stimulating expansion and growth in the public sector like education, health and infrastructure is an option. The economic stimuli, if sustained, will directly create demand for jobs. Lowering direct taxes is another measure that increases disposable income. This may translate into increased retail consumption. Increased demand for good and services increases employment opportunities. Increase in VAT is counter-productive in job creation. The government can also lower interest rates as this will increase the demand for credit by private and corporate entities. This not only increases public and private consumption; it may enable investment by the private sector. The interest rates in the UK are not controlled by the government but by the Bank of England. Lastly the government has an option of depreciating the currency. This will enhance exports at the expense of imports. It has double effect on the economy: boosting the local industry and encouraging public spending on the domestic goods. Albo concludes that the Keynesian perspective in the form of public investment or consumption was assumed to be an effective tool for stimulating growth and reducing unemployment. Neo-liberalism The neo-liberalism on the other hand believes that unemployment is voluntary and the problem should be left to the market forces to sort it out. Government intervention interferes with the natural distribution of resources and slows down growth.  Crotty observes that the free market perspective is based on Say’s law and Schumpeter’s arguments. Say’s Law of Markets states that supply creates equal level of demand while argues that employment is a specific, individual, voluntary problem of the labor market. Albo explains that this view holds that employers and employees deliberately accept or refuse wage offers. The main causes of unemployment according to this perspective are very high wages asked with too low profits earned hence a lower rate of investments and the use of labor-saving strategies. Albo proposes two broad options for available for governments have to lower unemployment. Lowering inflation make investors more assured of their investments. Expansion and growth of investments create more employment opportunities. Secondly, the governments should de-regulate non-market barriers so that real wages can fall or rise according to the demand in the labor market. Such barriers close new jobs and deter productivity and investment. The governments can protect the free market economy by reducing or eliminating interventions that control downward real wage mobility like trade unions, minimum wages and unemployment insurance. Summers observes that empirical data from a study in the US indicates that the main causes of long-term unemployment are welfare payments and unemployment insurance. According to the neo-liberalists, the governments should do away with these disincentives to employment if they want to lower unemployment. Similarly, governments should improve labor mobility and free flow of information on employment. Clasen and Taylor-Gooby note that unemployment varies from one region to another. They report that the rate of unemployment in the North and the Northwest of the UK and Wales was twice the rate in Southeast and areas around London. The most important macro-economic intervention should be limited to reducing inflation. The micro-economic forces of the market work efficiently to mop out unemployment. Conclusion Both Keynesian and neo-liberalism have strengths and limitations. Treanor argues that governments can both suppress and promote the market. Free markets need state protection and regulation to thrive. While free trade increases investment opportunities and employment mobility, Keynesian measures are important in enhancing employability of the vulnerable unemployed like the youth and the elderly. Keynesian perspective is advantageous in direct job creation through stimulus packages; it is deficient in the long run and sustainability. The merit of free market regulation of unemployment economizes government expenditure and involvement in job creation. The uncertainties and fluctuations of the free market can cause instability in the labour market. Both approaches may be integrated to inform a government policy for addressing crises like unemployment Bibliography ALBO Gregory. The socialist register. 1994 p 144-170. “Cameron and Clegg target youth unemployment ‘scandal’ ”BBC 12th May, 2011. http://www.bbc.co.uk/news/uk-politics-13370491 CLASEN Jochen and Peter-Gooby. Unemployment and unemployment policies in UK. CROTTY James “Structural Contradictions of Current Capitalism” A paper presented at the Conference on ‘Globalization, Structural Change and Income Distribution’, held at Chennai (Madras) in December 2000. www.twnside.org.sg/title/crotty1.htm MARGETTS Steve. Policies to reduce unemployment. Revision Guru. http://www.revisionguru.co.uk SUMMERS Lawrence H. “Unemployment” CEE 2008 2nd Edition http://www.econlib.org TREANOR Paul. “Neoliberalism: origins, theory, definition” http://web.inter.nl.net/users/Paul.Treanor/neoliberalism.html VESTERBYE Samuel Doveri, ‘Experts concerned as UK unemployment reaches 8 percent’ Hürriyet Daily News and Economic review Sunday 20 March 2011. http://www.hurriyetdailynews.com Read More