What Is the Natural Rate of Unemployment and Explain Why Unemployment Rates Are Sometimes Inaccurate. How Can Governments Mitigate Unemployment Problems in the Short Run and Long Run?

Name: Mohamed Sadeq Mohideen

Module: Contemporary Economic Policy

Topic:

What is the natural rate of unemployment and explain why unemployment rates are sometimes inaccurate. How can governments mitigate unemployment problems in the short run and long run?

Unemployment is always the result, when the available workplaces cannot adapt to the job seekers. When the number of persons, who offer their working capacities, exceeds the number of available workplaces, this leads to a lack in workplaces. Loosing a job can be the most distressing economic event that can occur in a person’s life. Most people rely on labor earnings to maintain there standard of living, and many people get from there work not only income but also a sense of personal accomplishment. Loosing a job means a lower standard of living cutting down on many necessities and of course all the luxury’s in life. Then comes the anxiety about the future and insecurity. In our society where money means success the unemployed feel useless and consider themselves a failure.
They are dissatisfied and depressed and this may lead to alcoholism drug problems and homelessness and even to crime. Especially for families it’s difficult because they don’t have enough money to afford their basics of life. Hence the government has to help financially, but this causes high costs for working people who have to support the unemployed.

The normal rate of unemployment around which the unemployment rate fluctuates is called the natural rate of unemployment. This is one of the many definitions available for the natural rate of unemployment. Unemployment has become a serious economic problem. In third world countries the majority of people can only make living by working for others. Many millions of people are both able and willing to work, but simply cannot find a job. The problem with such countries is that the types of workers who are looking for jobs are often different from the types of workers wanted by the employers. For various reasons, the unemployment rate cannot be reduced to zero, if only because people are always being fired, laid off or moving between jobs. But even granting that unemployment can never be completely eliminated, it still might be possible to ensure that anyone searching for a job can find one reasonably quickly. Economists call this happy state of affairs "full employment."

In the last years there have been many changes concerning the market situation, technological developments and other parts of the labour market. Firms that don’t adopt their production program, get a problem, because in the market situation goods that were sold in former times are not needed anymore. A typical example is a typewriter. Until the 1980’s a typewriter was irreplaceable in an office it was the technological standard in the last 100 years. But today everybody would laugh if the technological standard in an office were a typewriter, because nowadays we live as a computer aided generation
Another point is that companies replace workers with machines. The machines work round of the clock and the machines don’t have to be paid over time. A machine doesn’t break down for a long time so the costs are cheaper and more calculable.

What’s more, larger companies often relocate their company headquarters. They choose a country with lower wages and lower labour costs. Sometimes they prefer illegal workers or even children in order to get a higher profit. But on the contrary job recruits with a good knowledge of electronics and mechanics, a rising technical competence and also a broad general education are needed.

Statistics based on unemployment are often inaccurate because unemployment rates just measure who check in with the unemployment office or someone who is actively looking for a job through various media. It doesn't factor in people who have moved back to wherever they originally were from, people who went back to school or people who have just given up or retired or people who already have a steady job and are looking for a another step up the hierarchy of needs. A high rate of migration or retirement can cause dip in the unemployment curve.

Not all aspects deal with the migration and retirement. Governments overlook simple factors that cause a rise in unemployment rates. For example America's employers added 146,000 jobs in January, a very unimpressive statistic. Most economists had expected the economy to gain about 200,000 jobs in January. The unemployment rate dropped to 5.2 percent in January from 5.4 percent in December as people left the job market for any number of reasons. One of the major causes is that the economy is producing a moderate amount of job growth, but not a satisfying amount of job growth. That means there are a limited number of new opportunities for workers. In a recent report Ken Mayland, president of ClearView Economics, stated there were employment gains in January in a wide variety of service sectors, including retail. But these were partially offset by job losses at factories and in construction. Manufacturers, which were hardest hit by the 2001 recession and have struggled the most to get back on firm footing, lost 25,000 jobs in January, after shedding 7,000 in December. It marked the fifth straight month that the factory sector lost jobs. Construction companies cut 9,000 positions in January, probably related to wintry weather. That came after 14,000 positions were added in.

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An effective example where a city has improved its rate of unemployment in comparison to the country is New York City. Conditions in New York City's employment market improved from 1990-1995. Nominal annual wages in New York City, comprising the bulk of household income, rose to $40,876 in 1994, an increase of 1.3%. Payroll, which accounts for both employment levels and compensation, increased nearly 5% between the second quarters of 1994 and 1995. Other signs of expansion include a 0.5% reduction in New York's unemployment rate, an increase in the number of jobs available in the five boroughs, and fewer housing court actions. Clouding these statistics, average weekly unemployment claims rose by 7% and strict eligibility and work requirements have been imposed on welfare recipients along with reduced benefit levels.

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Rents registered with the Division of Housing and Community Renewal increased about 3% from 1993 to 1994. With similar increases in rents from 1994 to 1995 and improved employment conditions, it is likely that most tenants experienced little change in housing affordability in 1995.
It is more difficult to say how low-income renters have fared, though. As the relatively high-wage, low-skill manufacturing sector continues to downsize, these positions are replaced by low- wage, low-skill service jobs. Worse, there are few positions available to service sector workers who are ready to climb to the next employment rung. At the same time, public assistance benefits are being scaled back, further reducing household income, when rental households with total median incomes of less than $20,000 already pay half of their earnings toward rent. Overall, recent changes will likely lead to a slight increase in rent-to-income ratios for New York City's poor renters.
A comparison of housing cost burdens of urban areas across the country, however, reveals that tenants in other central cities pay a higher proportion of their incomes toward housing costs than do New York's tenants. Three-quarters of cities with large renter populations have median rent-to-income ratios above New York's median of 28%, and half have median ratios of 31% or more.

Nevertheless is very hard for governments to find effective solutions in the long run. A few measures being taken in recent times to curb unemployment rates are early retirement job-sharing, New jobs (new economy ), a general reduction of working hours and a reduction of overtime, but these solutions do not tackle the problem at the root. Some ideas such as job-sharing or early retirement are in discussion. But my opinion on that is that both, job-sharing and early retirement isn’t the right way, because if you share your job you won't earn enough money to afford the basics of life for your family. Early retirement sounds nice but it means a huge amount of costs for all the other working people who have to pay for that. So this can't be the right way, I suppose. Education on consequences of unemployment would be the best step in the right path. A good solution would be the attendance of further training courses, so that unemployed people are trained to find a new job and learn new skills. The only problem about that are the costs, which are very high and the question is who is going to pay them.
When workers are unemployed, they, their families and the country as a whole lose. Workers and their families lose wages, and the country loses the goods or services which could have been produced. In addition, the purchasing power of these workers is lost, which can lead to unemployment for yet other workers.
To know about unemployment, the extent and nature of the problem, requires in depth information. How many people are unemployed? How did they become unemployed? How long have they been unemployed? Are their numbers growing or declining? Are they men or women? Are they young or old? Are they white or black or foreign? Are they skilled or unskilled? Are they the sole support of their families, or do other family members have jobs? Are they more concentrated in one area of the country than another? After these statistics are obtained, they have to be interpreted properly so they can be used together with other economic data, by policymakers in making decisions as to whether measures should be taken to influence the future course of the economy or to aid those affected by joblessness. In short the study should be deeper and the measures taken should be swift and serious since one factor depends on another, a cycle of events which could have serious consequences on interdependent factors. Therefore governments should include all factors that affect unemployment rates in policies and newly proposed economies. Unemployment can never be eradicated completely it can only be decreased, but it can be made an insignificant factor if it is dealt with at the source with the proper and accurate information for the development of the nation and the people in it.

Word Count: 1500 words

Bibliography:

Economics for Business – John Sloman and Mark Sutcliffe
Principles of Economics – N. Gregory Mankiw

References

US Department of Labour - Bureau of Labour Statistics

www.svbizinc.com

www.thirdworldtraveler.com/economics