Unemployment is a situation where people have no job whether they are quitted or being fired and they are actively searching for it. There are two theories that were explained about unemployment that is Classical theory and Keynesian theory.
2.0 THEORIES THAT EXPLAIN UNEMPLOYMENT
2.1 CLASSICAL THEORY
The first theory is Classical theory. It was first developed by Karl Max. From this theory it state that the level of unemployment will increase if there is government intervention into the economy. The main reason that there is government intervention in the economy is because of want to improve the level of unemployment. Besides that, the factor of unemployment from the Classical view is the price and wages. If the price and wages are flexible, then there will be full of employment. However, in contrast, if the price and wages is not flexible like it were increase or decrease then it will cause unemployment. Therefore, prices and wages should move freely and also no government intervention in the economy in order to prevent the unemployment. Not only that, under Say’s Law which it is the basis of Classical theory is also state that there is should not have government intervention into the economy to prevent the unemployment and said that supply will create its own demand. It means that all the goods that has been produced either in small or big amount will be buy by consumer. As a result, there will be none of unemployment because of firms will keep produce goods and will not reduce the number of its worker. However, this view is opposite with the Keynesian theory.
Figure 1 show that the graph of how different level of wages will affect the quantity of labor. When wages are increase from to , the quantity of supply for labour will increase from to . This is because people will be interested in high wages especially those who are unemployed. This will cause excessive in supply for labour. However, when wages is decrease from to , the quantity of demand for labour will decrease from to . This happen because of firms will demand more labour as wages has decrease in order to reduce their cost. However, most of people will not interested thus cause excessive in demand for labour and increase the level of unemployment.
2.2 KEYNESIAN THEORY
Second is Keynesian theory. It was developed by John Maynard Keynes where he said that relying on markets to get full employment was not a good idea. He believed that the economy could settle at any equilibrium and that there would not be automatic changes in market to correct this situation. Therefore government intervention in the economy is necessary in order to maintain the low level of unemployment. The equilibrium is determined by aggregate demand. If there is an increase aggregate demand in economy, there will be more goods and services that will be produced by firms and it will need more workers, therefore the point of equilibrium can be achieved.
Figure 2 show that as price increase from to , aggregate demand is decrease from to . Demand for labour is also decrease because of most firms will reduce the amount of goods that need to be produced and it worker as the aggregate demand is decrease. Next is when the price is decrease from to , aggregate demand is increase from to . Demand for labour is also increase because most of firms will increase the number of their worker to produce more goods in order to satisfy the aggregate demand. However, supply for labour will remain same that is increase in both situations because of people who are unemployed want to work.
3.0 CAUSES OF UNEMPLOYMENT
3.1 LEVEL OF REAL WAGES
If wages that being offered to labours is low, then they will not interested to work thus make the level of unemployment high. The reason for firms to offer low wages is because of they want to reduce their cost of production so that they will gain more profit. 3.2 LACK OF AGGREGATE DEMAND
Lack of aggregate demand for goods and services are always occurs during recession where there is insufficient of money for consumers to buy goods and services thus forces firms to reduce their number of goods and services that need to be produced and the demand for labour will also decrease. As a result, a lot of people will be unemployed. 3.3 FRICTIONAL UNEMPLOYMENT
Frictional unemployment occurs because of the normal turnover in the labour market and the time that people take to find new job. For examples, students who just graduates will take time in order to find jobs that are suitable with their qualifications and they will find the best wage rates. 3.4 STRUCTURAL UNEMPLOYMENT
The causes that may lead to structural unemployment is when the structure of the company changes where there will be mismatches between the skills that employers wants and the skill that employees have. This happen nowadays that most of traditional industries has developed to the modern one. For example before computer is created people will use typewriter to type everything but after computer is created firms mostly wants to hire worker whom already how to use it rather than people who not know. As a result people who do not how to use it will lose their jobs thus cause unemployment. 3.5 VOLUNTARY UNEMPLOYMENT
Voluntary unemployment occurs when people choose to stay unemployed because of certain reason such as people will find or wait for the job that will give their highest income. However, this situation is not good as it make the level of unemployment increase.
4.0 WAYS TO REDUCE UNEMPLOYMENT BY GOVERNMENT
4.1 IMPROVEMENT IN LABOUR SUPPLY
It means that government may allocate some funds to train people so they have the skills that are required by most companies hence these peoples will be offered for a work. 4.2 REDUCE TAXES
Government may reduce the taxes especially for companies. This is because, if taxes for companies has been reduce, then companies’ expenditure will be reduce too so they can hired jobs to more people. 4.3 INCREASE IN GOVERNMENT SPENDING
In order to reduce the rate of unemployment, government can increase spending on development projects. For example, open a new factory or build new houses. By doing this, there will be a lot of jobs opportunities that are needed. Therefore, for those who do not have jobs, they can apply for it. As a result, government can reduce the unemployed rate. 4.4 GIVE SUBSIDIES
Government can also give employment subsidies. It means that government will give subsidies for those firms that hired long term employee so that they can increase the size of their workforce where they also can increase their number of employee. 4.5 INCREASE AGGREGATE DEMAND
Government should also increase the aggregate demand. For example, government can lower the direct taxes so that the aggregate demand will increase. Once it is increase it will force firms to produce more goods and services. In order to do it, firms will demand more labour so people will be hired for jobs and this can reduce the rate of unemployment.
In conclusion, it will not be a big issue if the rate of unemployment for a country is low but it will be a big problem if the rate is high. This is because employment can cause a country’s economic decline and stagnation. If this situation continues, a country might bankrupt.
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