Introduction
The Bureau of Labor Statistics defines unemployment as people without a job, have actively looked for work in the last one month, and who can currently take up a job. It also includes people who have been made redundant or have been laid off and are waiting for a recall. The Bureau does not regard people who have not looked for a job in the past one month as unemployed. This is because most people leave the workforce when they are disabled, retire, go back to school or are weighed down by family responsibilities. It also regards people who have looked for a job in the past year and not in the last four weeks as being part of the labor force marginally ( Bell, 2000 ).
Causes of Unemployment
Unemployment is caused in two major ways. There is cyclical unemployment which is largely as a result of an economic recession, and the natural rate of unemployment, which is caused by several factors in the labor market such as government policies and regulations with regards to starting businesses or companies. Unemployment that is caused by recession largely depends on financial and monetary tools applied by a government. A government that applies an expansionary monetary policy increases the amount of money and loans and also drives down interest rates to increase aggregate demand. However, a country can experience recession if there is little supply of money to run government. This can lead to limited loan facilities and high interest rates which discourage investments and leads to unemployment. On the other hand, a government that lacks and appropriate fiscal policy and fails to utilize automatic economic stabilizers can create a situation that slows down economic activities which also results into high unemployment rates. Recession makes the economic climate to be unstable and these forces private businesses to keep their workforce lean ( Bell, 2000 )..
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The natural rate of unemployment is dependent upon respective governments and countries. The pattern of high unemployment rates is higher in developing countries as opposed to developed economies like the United States and Europe. For example, the unemployment rate in Europe is higher than that of America because they have many restrictions which discourage many businesses from hiring leading to a situation where many unemployed people lack jobs. However, it is not an easy task to address the natural rate of unemployment. Governments need to play a pivotal role in formulating rules with regards to private businesses and investments, provide welfare payments, and providing a good enabling environment for businesses. However, some of these laws and regulations can prove intrusive and discourage businesses from employing people. For instance, laws that charge high penalties for businesses who lay off or fire workers will make some businesses not to hire. It is, therefore, important for governments to try and balance their labor laws to be friendlier to businesses to encourage them to hire workers ( Bell, 2000 )..
Most developing countries are largely affected by unemployment due to several factors which are not found in more developed economies. Most workers in developing countries earn their living from activities such as farming, fishing, or hunting. Some of them only work for short duration of time for wages and are paid to only sustain themselves. According to the Bureau of Labor and Statistics definition, this type of workers are not unemployed in the real sense of the word. Any economic activity has to incorporate the division of labor where every worker specializes in a certain area of work. Workers who are not specialized are not connected to the labor market. The fact that these workers are not officially employed makes them unable to access social benefits like old age payments or unemployment benefits. It is, therefore, important to incorporate these workers into the labor market to make them have an effect on the economy ( Gottheil, 2013 ).
In the national level unemployment is caused by various factors such as when the economy of a country slows down. This makes most businesses to employ cost cutting measures by reducing payroll expenses. This is a situation that causes recession and financial crisis. Unemployment can also be caused by competition in specific companies or industries. For example, technological advancement such as the introduction of robots and computers can cause unemployment because the tasks performed by workers are replaced by machines. This situation makes most workers to leave the labor force, a situation that creates unemployment. The recent business practice of job outsourcing is also a major cause of unemployment. Job outsourcing takes different dimensions and includes aspects such as human resources, technology, and call centers (Amadeo, 2018).
Economic Effects of Unemployment
Unemployment portends both economic and social costs. This includes private costs, which is as a result of loss of income; costs to the government, which might result due to loss of income tax; and costs to the society, which might result into loss of GDP and an increase in social problems. The unemployed experience loss of earnings due to their status and this is the cause of poverty to many people around the world. When unemployment is prolonged it can lead to serious cases of household debt which in turn increases the rate of relative poverty. This state of poverty can force people to become homeless because they are unable to meet housing costs due to insufficient income. This then means that higher rates of unemployment leads to higher rates of homeless people. This is a situation that leads to gross social problems not only to individuals but also to the government and society at large.
It is also common that people who are unemployed have a lower chance of getting any gainful employment in future and this affects their personal development. This can lead to social problems such as crime, prostitution and many other social vices. It can also lead to health complications such as stress and depression. Studies have shown that unemployed men have a higher chance of showing signs of mental anxiety, depression, and other related health problems ( Rosenfeld, 2013 ).
Unemployed also causes loss of human capital. People who are not employed miss out on job training and this affects their prospects engaging in active work. They lack the necessary skills and experience to perform any work. This affects society because of lack of skillful and experienced workforce to develop the country. Job training helps individuals to acquire labor skill which greatly improves human capital. The lack of human capital has a negative impact on labor productivity. Prolonged unemployment makes individuals to lose out on the latest working trends and practices. As a consequence, it affects the confidence levels of the unemployed which makes it difficult for them to secure employment in future ( Bell, 2000 ).
Unemployment also makes the government to fall into debt due to high levels of borrowing. The government is forced to borrow more to run its activities because the tax that it collects is not sufficient. Unemployment causes tax revenue to dip because fewer people are paying income tax and also there is less spending due to lack of income. When people spend more, the government is able to get VAT. However, unemployed people spend less because they do not have an income. There is also an increase in government expenditure due to unemployment because it has to provide welfare services and other related benefits to the unemployed. The government not only pays unemployment benefit but also other expenses including income support and housing benefits. This is a big drain on government coffers which forces it to borrow heavily ( Gottheil, 2013).
Unemployment also has a negative effect on the GDP of a country. This is because a country that has a higher level of unemployment is one that is operating below its full potential and is also inefficient. Such a scenario indicates that the country has lower productivity and hence lower incomes. The unemployed people have a lower purchasing power and cannot purchase many goods and services this in turn leads to lower spending and output. This can lead to a negative multiplier effect on the economy. In the same vein, high unemployment rates is a major cause of social problems in society. The situation is made worse if there is a high rate of youth unemployment. Youth unemployment might lead to high rates of crime and vandalism. This is something that results into alienation which can make it difficult to integrate this age group into mainstream society ( Bell, 2000 ).
Summary
It is important to note that unemployment greatly affects the economic and social aspects of a country. Its effects run deep and leads many problems which need to be mitigated. Unemployment has leads to losses from an individual level up to the societal and governmental levels. There is loss of income to an individual due to unemployment which also translates into loss of government revenue, and loss to society due to the many social problems created by unemployment. Cyclical unemployment can be remedied when a government applies good expansionary and monetary policy that will be able to spur economic growth and increase the rate of investments in a country. However, the natural rate of unemployment can present a big challenge and requires well-thought out laws and regulations that affect hiring and employment.
References
Amadeo, K. (2018).Unemployment, Its Causes, and Its Consequences. The balance. Retrieved from https://www.thebalance.com/what-is-unemployment-3306222
Bell, S. (2000). The unemployment crisis in Australia: Which way out? . Cambridge: Cambridge Univ. Press.
Gottheil, F. M. (2013). Principles of economics . Mason, OH: South-Western Cengage Learning.
Rosenfeld, R. (2013). Economics and youth violence: Crime, disadvantage, and community . New York: New York University Press.
