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How do we solve unemployment?

Sun, 12 October 2014 21:51
by Mr. T
Columns

Debate continues to rage in about the percentage of unemployment, or what we call unemployment. To me, it’s a question of symantics, unemployment refers to a situation where capable individuals are failing to find employment, not being underpaid but not finding anything to do.
The other angle that will be of great concern is the statement of saying not finding anything to do. In that regard if you are a qualified doctor and you dont find employment and you end up having an electrical shop, you cant qualify as unemployed because you have something to do. I know many of you disagree with me here but lets say what we call unemployment  is people who cant put food on the table. People who are not willing or able to work, for whatever reason, are “economically inactive” and do not count towards unemployment figures.
High levels of unemployment are usually typical of a struggling economy, where labour supply is outstripping demand from employers.
When an economy has high unemployment, it is not using its economic resources in the best possible way.
Unemployment also carries significant social costs. People who are unable to find work must frequently rely on benefits for income: If they have financial or family commitments, this can make life extremely difficult. Moreover, the sense of failure, boredom and rejection that being unemployed can generate has real social consequences. Studies have repeatedly linked unemployment to rising crime and suicide rates and the deterioration of health.
What type of unemployment is Namibia facing?
In finance we have about five different types of unemplyment as will be summaried below and it will be of very much importance if we fully understand the kind of unemployment that we are faced with.
Demand Deficient Unemployment.
Demand deficient unemployment occurs in a recession or period of very low growth. If there is insufficient Aggregate Demand, firms will cut back on output. If they cut back on output then they will employ fewer workers. Firms will either cut back on recruitment or lay off workers. The deeper the recession, the more demand deficient unemployment there will be. This is often the biggest cause of unemployment, especially in a downturn. This is also known as cyclical unemployment – referring to how unemployment increases during an economic downturn.
Structural Unemployment
This is unemployment due to inefficiencies in the labour market. It may occur due to a mismatch of skills or geographical location. For example, structural unemployment could be due to:
Occupational immobility.
There may be skilled jobs available, but many workers may not have the relevant skills. Sometimes firms can struggle to recruit during periods of high unemployment. This is due to the occupational immobility.
Geographical immobility.
Jobs may be available in Omuthiya, but unemployed workers may not be able to move there due to difficulties in getting housing etc.
Technological change.
If an economy goes through technological change, some industries will decline. This is likely to lead to structural unemployment. For example, new technology (nuclear power) could make coal mines close down leaving many coal miners unemployed.
Real Wage Unemployment / Classical Unemployment
This occurs when wages are artificially kept above the equilibrium. For example, powerful trades unions or minimum wages could lead to wages above the equilibrium leading to excess supply of labour (this assumes labour markets are competitive) Keynesian analysis suggests a fall in aggregate demand (AD) can lead to real wage unemployment as wages are sticky downwards and a fall in AD doesn’t lead to wages clearing.
Frictional unemployment: This occurs when workers are in between jobs e.g. school leavers take time to find work. There is always likely to be some frictional unemployment in an economy as people take time to find a job suited to their skills.
Voluntary Unemployment: This occurs when workers choose not to take a job at the going wage rate. For example, if benefits offer a similar take home page to wage – tax, the unemployed may feel there is no incentive to take a job.
Namibia`s unemployment seem to be a bit unque. I will consider  a punch or mixture of all of the above but the biggest being DEMAND Unemployment.  The demand for employment outstrips the supply.There are two main strategies for reducing unemployment –
Demand side policies to reduce demand-deficient unemployment (unemployment caused by recession)
Supply side policies to reduce structural unemployment / (the natural rate of unemployment)
1. Fiscal Policy
Fiscal policy can decrease unemployment by helping to increase aggregate demand and the rate of economic growth. The government will need to pursue expansionary fiscal policy; this involves cutting taxes and increasing government spending. Lower taxes increase disposable income and therefore help to increase consumption, leading to higher aggregate demand (AD.
The other point to note is the opening of markets to foreign investors. Namibia is a country with only 1.2 million people and their demand for most products is somehow very insignificant and will lead countries like South Africa to continue exporting to Namibia. The best other strategy is to increase the number of foreign investors and professionals, which will in turn increase productivity and aggregate demand leading to employment.
Impact of Higher AD on Economy
However,
It depends on other components of AD. e.g. if confidence is low, cutting taxes may not increase consumer spending because people prefer to save. In addition, people may not spend tax cuts, if they will soon be reversed.
Fiscal policy may have time lags. E.g. a decision to increase government spending may take a long time to have an effect on increasing AD.
If the economy is close to full capacity an increase in AD will only cause inflation. Expansionary fiscal policy will only reduce unemployment if there is an output gap.
Expansionary fiscal policy will require higher government borrowing – this may not be possible for countries with high levels of debt, and rising bond yields.
In the long run, expansionary fiscal policy may cause crowding-out, i.e. the government increase spending but because they borrow from private sector, they have less to spend and therefore AD doesn’t increase. However, Keynesians argue crowding out will not occur in a liquidity trap.
2. Monetary Policy
Monetary policy would involve cutting interest rates. Lower rates decrease the cost of borrowing and encourage people to spend and invest. This increases AD and should also help to increase GDP and reduce demand deficient unemployment. Also lower interest rates will reduce exchange rate and make exports more competitive. However in our case this will not work to our advantage as our manufacturing is very small therefore we don’t have such exports to protect. In some cases, lower interest rates may be ineffective in boosting demand. In this case, Central Banks may resort to Quantitative easing. This is an attempt to increase money supply and boost aggregate demand.
Supply Side Policies for Reducing Unemployment
Supply side policies deal with more micro-economic issues. They don’t aim to boost overall Aggregate Demand, but seek to overcome imperfections in the labour market and reduce unemployment caused by supply side factors. Supply side unemployment includes frictional, Structural and Classical (real wage)
Policies to Reduce Supply Side Unemployment
1. Education and Training. The aim is to give the long term unemployed new skills which enable them to find jobs in developing industries, e.g. retrain unemployed steel workers to have basic I.T. skills which helps them find work in service sector. – However, despite providing education and training schemes, the unemployed may be unable or unwilling to learn new skills. At best, it will take several years to reduce unemployment.
2. Reduce Power of trades unions. If unions are able to bargain for wages above the market clearing level, they will cause real wage unemployment. In this case reducing influence of trades unions (or reducing Minimum wages) will help solve this real wage unemployment.
3. Employment Subsidies. Firms could be given tax breaks or subsidies for taking on long term unemployed youths. This helps give them new confidence and on the job training. However, it will be quite expensive and it may encourage firms to simply replace current workers with the long term unemployment in order to benefit from the tax breaks.
4. Improve Labour Market Flexibility. It is argued that the structural rates of unemployment in Namibia are due to restrictive labour markets, which discourages firms from employing workers in the first place. For example, abolishing maximum working weeks and making it easier to hire and fire workers may encourage more job creation. However, increased labour market flexibility could cause a rise in temporary employment and greater job insecurity.
5. Stricter Benefit requirements. Governments could take a more pro-active role in making the unemployed accept a job or risk losing benefits. After a certain time period the government could guarantee some kind of public sector job (e.g. cleaning streets). This could significantly reduce unemployment. However, it may mean the government end up employing thousands of people in un-productive tasks, which is very expensive. Also, if you make it difficult to claim benefits, you may reduce the claimant count, but not the Labour force.
6. Improved Geographical Mobility. Often unemployed is more concentrated in certain regions. To overcome this geographical unemployment, the government could give tax breaks to firms who set up in depressed areas like establish in regions. Alternatively, they can give financial assistance to unemployed workers who move to areas with high employment. This will also increase consumption in those areas and some SMEs will offshoot.
7. Encourage SME- this will be done through the establishment of colleges and vocational centres that will focus more on practical woks which doesn’t require education. If vocational college start offering mechanics, bricklaying, plumbing and these people become self-employed then we must solve the puzzle