LISTEN UP REAL GOOD TYPES OF UNEMPLOYMENT: (a) Structural Unemployment: It is also known as Marxian unemployment or long-term unemployment. It is due to slower growth of capital stock in the country. The entire labour force cannot be absorbed in productive employment, because there are not enough instruments of production to employ them. (b) Seasonal Unemployment: Seasonal unemployment arises because of the seasonal character of a particular productive activity so that people become unemployed during the slack season. Occupations relating to agriculture, sugar mills, rice mills, ice factories and tourism are seasonal. (c) Frictional Unemployment: It arises when the labour force is temporarily out of work because of perfect mobility on the part of the labour. In a growing and dynamic economy, in which some industries are declining and others are rising and in which people are free to work wherever they wish, some volume of frictional unemployment is bound to exist. This is so because it takes some time for the unemployed labour to learn new trades or to shift to new places, where there is a demand for labour. Thus, frictional unemployment exists when there is unsatisfied demand for labour, but the unemployed workers are either not fit for the jobs in question or not in the right place to meet this demand. (d) Cyclical Unemployment: It is also known as Keynesian unemployment. It is due to deficiency of aggregate effective demand. It occurs when business depression occurs. During the times of depression, business activity is at low ebb and unemployment increases. Some people are thrown out of employment altogether and others are only partially employed. This type of unemployment is due to the fact that the total effective demand of the community is not sufficient to absorb the entire productive of goods that can be produced with the available stock of capital. When the businessmen cannot sell their goods and services, their profit expectations are not fulfilled. So the entrepreneurs reduce their output and some factors of production become unemployed. (e) Disguised Unemployment: Disguised unemployment is the most widespread type of unemployment in under-developed countries. In under-developed countries, the stock of capital does not grow fast. The capital stock has not been growing at a rate fast enough to keep pace with the growth of population, the country’s capacity to offer productive employment to the new entrants to the labour market has been severely limited. This manifests itself generally in two ways: (i) the prevalence of large-scale unemployment in the urban areas; and (ii) in the form of growing numbers engaged in agriculture, resulting in ‘disguised unemployment’. In disguised unemployment, there is an existence of a very backward agricultural economy. People are engaged in production with an extremely low or zero marginal productivity. Since the employment opportunities in non-agricultural sector are not sufficient, therefore, most of the workers are bound to work in agricultural sector. This gives rise to the concept of ‘disguised unemployment’, in which people are unwillingly engaged in occupations, where their marginal productivity is very low. THEORIES OF EMPLOYMENT: The theories of employment are broadly classified into two: (a) Classical theory of employment (b) Keynesian theory of employment. The classical theory assumed the prevalence of full employment. The ‘Great Depression’ of 1929 to 1934, engulfing the entire world in widespread unemployment, low output and low national income, for about five years, upset the classical theorists. This gives rise to Keynesian theory of employment. Classical Theory of Employment: The term ‘classical economists’ was firstly used by Karl Marx to describe economic thought of Ricardo and his predecessors including Adam Smith. However, by ‘classical economists’, Keynes meant the followers of David Ricardo including John Stuart Mill, Alfred Marshal and Pigou. According to Keynes, the term ‘classical economics’ refers to the traditional or orthodox principles of economics, which had come to be accepted, by and large, by the well known economists by then. Being the follower of Marshal, Keynes had himself accepted and taught these classical principles. But he repudiated the doctrine of laissez-faire. The two broad features of classical theory of employment were: (a) The assumption of full employment of labour and other productive resources, and (b) The flexibility of prices and wages to bring about the full employment (a) Full employment: According to classical economists, the labour and the other resources are always fully employed. Moreover, the general over-production and general unemployment are assumed to be impossible. If there is any unemployment in the country, it is assumed to be temporary or abnormal. According to classical views of employment, the unemployment cannot be persisted for a long time, and there is always a tendency of full employment in the country. According to classical economists, the reasons for unemployment are: (i) Intervention by the government or private monopoly, (ii) Wrong calculation by entrepreneurs and inaccurate decisions, and (iii) Artificial resistance. The economy is assumed to be self-adjusting and perfectly competitive economy. It is the economy in which the relative values of goods and services are determined by the general relations of demand and supply. The pricing system serves as the planning mechanism. (b) Flexibility of prices and wages: The second assumption of full employment theory is the flexibility of prices and wages. It is the flexibility of prices and wages which automatically brings about full employment. If there is general over-production resulting in depression and unemployment, prices would fall as a result of which demand would increase, prices would rise and productive activity will be stimulated and unemployment would tend to disappear. Similarly, the unemployment could be cured by cutting down wages which would increase the demand for labour and would stimulate activity. Thus, if the prices and wages are allowed to move freely, unemployment would disappear and full employment level would be restored. Further, the classical economists treated money as mere exchange medium. They ignored its role in affecting income, output and employment. Say’s Law: Say’s Law is the foundation of classical economics. Assumption of full employment as a normal condition of a free market economy is justified by classical economists by a law known as ‘Say’s Law of Markets’. It was the theory on the basis of which classical economists thought that general over-production and general unemployment are not possible. According to the French economist J. B. Say, supply creates its own demand. According to him, it is production which creates market for goods. More of production, more of creating demand for other goods. There can be no problem of over-production. Say denies the possibility of the deficiency of aggregate demand. The conceived Say’s Law describes an important fact about the working of free-exchange of economy that the main source of demand is the sum of incomes earned by the various productive factors from the process of production itself. A new productive process, by paying out income to its employed factors, generates demand at the same time that it adds to supply. It is thus production which creates market for goods, or supply creates its own demand not only at the same time but also to an equal extent. According to Say, the aggregate supply of commodities in the economy would be exactly equal to aggregate demand. If there is any deficiency in the demand, it would be temporary and it would be ultimately equal to aggregate supply. Therefore, the employment of more resources will always be profitable and will take to the point of full employment. According to Say’s Law, there will always be a sufficient rate of total spending so as to keep all resources fully employed. Most of the income is spent on consumer goods and a par of it is saved. The classical economists are of the view that all the savings are spent automatically on investment goods. Savings and investments are interchangeable words and are equal to each other. Since saving is another form of spending, according to classical theory, all income is spent partly for consumption and partly for investment. If there is any gap between saving and investment, the rate of interest brings about equality between the two. Basic Assumptions of Say’s Law: (a) Perfectly competitive market and free exchange economy. (b) Free flow of money incomes. All the savings must be immediately invested and all the income must be immediately spent. (c) Savings are equal to investment and equality must bring about by flexible interest rate. (d) No intervention of government in market operations, i.e., a laissez faire economy, and there is no government expenditure, taxation and subsidies. (e) Market size is limited by the volume of production and aggregate demand is equal to aggregate supply. (f) It is a closed economy. Pigou’s Theory: 1. According to Professor Pigou, the unemployment which exists at any time is because of the fact that changes in demand conditions are continually taking place and that frictional resistances prevent the appropriate wage adjustment from being made instantaneously. Thus, according to classical theory, there could be small amounts of ‘frictional unemployment’ attendant on changing from one job to another but there could not be ‘involuntary unemployment’ for a long period. According to Professor Pigou, if people were unemployed, wages would fall until all seeking employment were in fact employed. Involuntary unemployment which was found at times of depression was because of the fact that wages were kept too high by the actions of labour unions and governments. Therefore, Professor Pigou advocated that a general cut in money wages at a time of depression would increase employment. According to Pigou, perfectly elastic wage policy would abolish fluctuations of employment and would ensure full employment. The of the economy as described by the classical theory is depicted as follows:
Posted on: Sat, 31 Aug 2013 00:30:47 +0000
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