Unemployment part 3

1. Unemployment part 3 Theories

2. Keynesian Theory • Keynesian theorists believe that the lack of demand for labour depended on the lack of demand for goods. To remedy the lack of demand for goods, aggregate demand needed to be . *In macroeconomics, aggregate demand is the total demand for final goods and services in the economy at a given time and price level • In other words, if people are not buying goods and services, there is no need to have someone selling/making . So unemployment occurs. • Therefore in times of high unemployment the Keynesians would say that the key is to stimulate aggregate demand. i.e. get people buying again.

3. The suggest that by increasing spending the government can increase demand by stimulating growth. Some examples are- creating jobs in public sector, giving people money to start up businesses, reducing tax levels. However it’s not that simple: • Consumer & Business confidence: When business and consumer confidence is low there is a danger that high rates of saving can make a recession worse. This is known as the paradox of thrift. In this situation weaker demand for goods and services causes further job losses. • Also – Keynesian theorists suggest that governments borrow so they can increase their spending … but this leaves more debt that most likely will increase taxes, thus reduce spending again!

4. The classic theory • Explains unemployment in terms of overpriced labour • Unemployment occurs when the real wages for workers in an economy are too high, meaning that firms are unwilling to employ every person looking for a job. • When real wages are too high, it means that the cost of employing an extra worker is higher than the benefit from employing an extra worker. • So when real wages are too high in an economy, firms cannot profitably employ all the labour on offer. As a result, some of the economy’s pool of labour is not used.

5. Neo-Classical Theorists Monetarists (neo-classical) believe attempts to manage demand (as in the keynesiantheory) were misguided and bound to fail. They believed there was a ‘natural rate’ of unemployment below which unemployment could not be kept without giving rise to  inflation. The ‘natural rate of unemployment’ is known as the NAIRU , the Non Accelerating Inflation Rate of Unemployment. Neo-classical economists suggest that there is a “natural rate of unemployment” – anything below this rate cannot be kept up for the long run • For example, if the “natural rate” for Ireland was approx 5%, then low levels during a boom of say 3% could not be expected to stay this way for long – i.e. when the boom levels out or when a recession occurs.

6. Karl Marx –Marxian Theory • Marxian Theory – conflict between capital (employers) and labour (employees) will always be a feature of all modern economies. • Employers want higher profits and lower wages. • Employees want the opposite. • This struggle between the classes will result in a system (Capitalism) going through booms and slumps until workers get so poor that they overthrow Capitalism.

7. In Sum • Marxists believe that capitalists, who are constantly seeking greater profits, replace labour with machinery, causing unemployment. • Do you think this is true? • Can you give any recent examples in Ireland were employees are being replaced by machines?

8. Supply siders • Supply siders believe that a government should concentrate on matching labour to new jobs by providing retraining, infra-structural investment, low taxes etc… • Do you think this would be a good way for Ireland to deal with our unemployment issue? • Why? (consider types of unemployment)

9. To summarise: • The Classical theory explains unemployment in terms of overpriced labour. • Keynesians believe that unemployment is caused by lack of demand for goods and services. • Neo – classical economists believe that there is a natural rate of unemployment (NAIRU) below which it could not be pushed in the long term.

10. summary • Marxists believe that capitalists, who are constantly seeking greater profits, replace labour with machinery/technology causing unemployment. • Supply siders believe that a government should concentrate on matching labour to new jobs by providing re-training, infrastructural investment, low taxes etc..