economics ia


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economics ia

  1. 1. REPORT Unemployment can be defined as the number of people who are actively seeking for awork but are currently without a job as defined by John Sloman in is book “Economics”.Unemployment carries various cost with it, which is a result of its causes, however thegovernment of Jamaica put policies in place to reduce unemployment. The Keynesian view of unemployment is that, “the contention that the unemploymentwhich characterizes a depression is due to a refusal by labour to accept a reduction of moneywages is not clearly supported by the facts”. Keynesian economist believes that unemploymentcan be reduced by; having a maximum level of national output which will eliminate real wageand cyclical unemployment which are of major concern. The Classical view of unemployment is that, “unemployment would occur only if labourmarket failed to clear: if real wage cost did not fall sufficiently. The Classical Treasury viewstates that people should be encouraged to take wage cuts. This would also help to reduceprices and restore export demand, thus correcting the balance of payment. People should alsobe encouraged to save. This would, via flexible interest rates, lead to more investment andhence a growth in output and demand for labour. The Jamaican economy has a labour force (the number employed plus the numberunemployed) of one million three hundred and eleven thousand (1,311,000) in the 2008 to2009 period, of this labour force during the 2008 and 2009 period the economy had anunemployment rate (the number expressed as a percentage of the labour force) between theregion of eleven percent (11%) and fifteen percent (15%). Figure 1 shows the fluctuation of the
  2. 2. unemployment rate as the recession (a period where national output falls for months or more)intensify and unemployment rate increases from eight point five percent (8.5%) in 2007 toeleven percent (11%) in 2008 and to fourteen point five percent (14.5%) in 2009. Underemployment can be defined as where people want full time works are only able tofind part time works. People sometimes confused underemployment with unemployment;however they are two different terms. Underemployments can however lead tounemployment, were person are seeking for a full time job and not a part time job, which willlead to frictional unemployment. There are various types of unemployment; each type of unemployment has it specificcause. These types of unemployment are namely real wage, cyclical, frictional, structural andseasonal unemployment. All the mention types of unemployment affected the Jamaicaneconomy during the period being investigated, 2008 to 2009. Real Wage unemployment can be defined as real wage being driven up above themarket-clearing level, whether by the government or by some employers. During 2008 theJamaican economy faced a problem of real wage unemployment when the government ofJamaica increases minimum wages from four thousand dollars ($4000.00) a week to fourthousand eight hundred dollars ($4800) a week, as shown in figure 2. This move increase thesupply of labour from two hundred and fifty thousand (250,000) to three hundred thousand(300,000), while the demand fall from two hundred and seventy thousand to one hundred andeighty thousand (270,000 – 180,000) also shown in figure 2.
  3. 3. Cyclical unemployment can be defined as a fall in aggregate demand with nocorresponding fall in the real wage rate. In the mid to late 2008 when the Jamaican economywas hit by the global recession it began also to be hit by cyclical unemployment. Signs of thecyclical unemployment were shown when Air Jamaica, a member of the tourism industry laidoff five hundred workers (500), and several bauxite companies in the mining industry laid off atotal of seven hundred workers (700). As shown in figure 3 Gross Domestic Product (GDP) fallfrom twenty four billion, thirty three million dollars ($24.33 billion) in 2008 to twenty threebillion, thirty six million dollars ($23.36 billion) in 2009 and total demand for labour fall fromone million, two hundred and six thousand (1,206,000) in 2008 to one million and sixty fivethousand (1,065,000) in 2009 while the supply of labour increases from one million, threehundred thousand (1,300,000) in 2008 to one million three hundred and eleven thousand(1,311,000) in 2009. Seasonal unemployment is where the demand for labour is lower at certain times of theyear. In the Jamaican economy without a throughout research it would not be obvious thatthere is seasonal unemployment. This is due to the fact that some industries might lay offworkers in one season while others will employ in those seasons. For the tourism sector forexample as shown in figure 4, the demand for labour decreases in the autumn and spring andrises back in the summer and winter periods. Frictional unemployment is as a result of imperfect information in the labour market. Aseries of frictional unemployment affected the Jamaican economy after a lot of persons weresacked and it took months for others to find a job, due to employers not able to locate persons
  4. 4. with the particular skills or ability to get the job done and prospective employees havingincorrect information on jobs available in the market. In figure 6 it shows where frictionalunemployment increases from three thousand (3000) in the first quarter of 2008 to threethousand eight hundred (3800) in the second quarter to four thousand five hundred (4500) inthe third quarter and to five thousand one hundred (5100) in the last quarter. When the 2009year stepped in it saw a decline to four thousand nine hundred (4900) in the first quarter, tofour thousand three hundred (4300) in the second quarter, three thousand eight hundred andfifty (3850) in the third quarter and to three thousand two hundred (3200) in the last quarter,when jobs were taken up in the agriculture sector. Unemployment during 2008 and 2009 had several blows at the Jamaican economy.These can be seen as the cost of unemployment, which involved a reduction in governmentrevenue, redistribution of income, decreased profit for firms and reduced benefits foremployees. Due to the fact that majority of the Jamaican revenue source is from taxation anincrease in unemployment will see a decrease in the total earnings for the country, shown infigure 7 where it show where the total earnings from the country is sourced. Another effect ofunemployment on the government was that it increases the government spending viabeneficiary offices such as PATH in order to issue out benefits. Unemployment also caused aredistribution of income from poor to rich, where it sought the poor using up savings in orderto finance their daily needs. Firms in the Jamaican economy had a blow from the increase inunemployment, where it helps to decrease the total net profit if there was full employment,where there will have full consumer spending. Persons who are employed also was affected by
  5. 5. the hike in unemployment since they weren’t allowed the same amount benefits as beforewhen they had a lower unemployment rate. Aggregate demand can defined as the total spending on goods and services in theeconomy. Aggregate demand consists of consumer spending, investment, governmentspending and net export. Aggregate demand in an economy can be affected by unemployment.In 2009 when unemployment increased to fourteen point five percent (14.5%) from elevenpercent (11%) in 2008, it showed a decline in aggregate demand in Jamaica. This was as a resultof a decline in consumer spending and investment which had a large share in the aggregatedemand. Investment started declining when two bauxite plants reduced and then closedoperations in 2009 which lead to an increase in the total number of persons unemployed. Thisexodus leads to a reduction in the total spending by consumers. Unemployment also caused anincreased in the net export, where export was one billion four hundred and twenty two milliondollars ($1.422 billion) in 2009 as compared to two billion six hundred and two million dollars($2.602 billion) in 2008, while imports decline from seven billion one hundred and eighty fivemillion dollars ($7.185 billion) in 2008 to four billion six hundred and twenty five million dollars($4.625 billion) in 2009, however net export increased to negative three billion two hundredand three million dollars (-$3.203 billion) in 2009 from negative four billion five hundred andeighty three million (-$4.583 billion) in 2008 as shown in figure 8. Unemployment and inflation over the years has a relationship going where the otherincreases when then the other decreases, it is more like a production possible curve whereboth commodities can not increase neither can both have a decrease. Inflation can be defined
  6. 6. as a situation where an increase in price of goods and services over a period of time normally ayear. The relationship which exists between inflation and unemployment was observed by theNew Zealand economist, who observed England’s unemployment rate and inflation rate fromthe 1800s to 1946. The relationship which was plotted on a graph was named the Phillip’sCurve. In the 1970s and upwards it showed where both inflation rates and unemployment ratesincreased. Economist defined this term as stagflation which means a simultaneously rise in bothunemployment rate and inflation rate; this can be caused by an increase production cost ofgoods and services. As it relates to the Jamaican economy with regards to inflation andunemployment rate the Phillip’s curve shows the exact relationship which occur in Jamaicafrom 2008 to 2009, when inflation decreases from twenty two percent (22%) in 2008 to eightpoint six percent (8.6%) in 2009 and unemployment rate increases from eleven percent (11%)in 2008 to fourteen point five percent (14.5%) in 2009 as shown in figure 9. Comparative advantage is a situation where one country has an advantage in theproduction of a good, where it can produce the good at a lower opportunity cost that is if it hasto forgo less of other goods in order to produce it. Comparative advantage also has a law thatstates that provided opportunity cost of various goods differ in two countries, both of them cangain from mutual trade if they specialize in producing (and exporting) those goods that haverelatively low opportunity cost compared with other countries. However in different countriescomparative cost are different, the cause of this difference in comparative cost was examinedby two Swedish economists, Eli Heckscher and Bertil Ohlin, who developed the theory knownas the Heckscher-Ohlin theory, which states that: a country should specialize in those goodsthat are intensive in the country’s abundant factor. Comparative advantage and unemployment
  7. 7. has a comparative advantage has a relationship where if a country has a comparativeadvantage of producing a product can increase employment if it export the product. Theincrease in employment will come about when the country has to meet the extra demand onforeign market; this will in turn increase the demand for labour on the local market. Howeverunemployment can affects comparative advantage of a country negatively. The Jamaicaneconomy which has a comparative advantage in producing coffee over Japan who ascomparative advantage in producing cars over Jamaica. In 2008 when the global recession hitJamaica economy like a hurricane and coffee the farmers where unable to pay workers whichcaused an increase in unemployment which in turn affects the comparative advantage of theJamaican economy. In general the government of a country has certain policies which it put in place toreduce unemployment or create jobs for the unemployed. These policies include fiscal policyand monetary policy. These policies can sometimes decrease the unemployment rate as well asincrease the unemployment rate. Monetary policies are policies use by Monetarist economistwhere they increase the money supply so as to increase the amount of money available toinvestors. This move will increase the total investment in the economy which, will thenincreases the demand for labour and in a short time unemployment will be lowered. However ifthe government of the country was to use an Keynesian method to solve the problem ofunemployment, it would use a fiscal policy where it increases the amount of money allocatedfor a particular sector such as health or security, so as to increase the demand for labour inthese sectors which will decreases the unemployment rate. These policies can howeverincreases unemployment especially the monetary policy where more money is available to
  8. 8. investors, instead of them spending the extra capital on labour they then invest more inmachinery to reduce the production cost and this will lead to workers bei9ng sacked leading toan increase in unemployment.