Economic Development and Unemployment

Ramaz Abesadze

Journal number 2 ∘ Ramaz Abesadze ∘
Economic Development and Unemployment

Summary

Unemployment has a great impact on economic development. This influence is mainly negative, although it can have a positive character. Unemployment, as the category, has been used for a long time in the science and practice, but definitions connected with it (“unemployed”, “natural unemployment”, “Labor power” and other), sometimes does not correspond to the truth. This is the issue of the articleas well as other problems connected with unemployment.

Keywords:Economic Development, Unemployment, Labor power, Economic growth.

Introduction

Unemployment represents macroeconomic problem, which has a great impact not only on the whole economy and society, but also on separate agricultural objects and each person. It has social, political, psychological and other burden. There are many reasons of unemployment: the transformation of economy, decrease of economy, mistakes in economic reforms, the implementation of innovations, the high level of corruption, the incompletes institutions, difficult political and criminal situation and so on. Forthe purpose of conducting scientific and practical activities related to un employment, the definitions of the terminology connected with it should fully comply with the truth, that, in our opinion, in some cases does not take place. It is also important to study the problems connected with economic rise and unemployment and loses es caused bay unemployment.

The impact of unemployment on economic development

Unemployment has a huge influence on economic development that is expressed in the following: unemployment (especially long-term) reduces human capital magnitude of the society, as the qualification level of an unemployed person, physical and mental abilities are being reduced gradually; as there are losses of output, the volume of savings is being reduced that cuts down investments, including investments in innovations during unemployment. Financing of scientific research projects are also reduced as by the government as well as by private sector, which has a negative impact on economic development processes not only in short-term, but also in long-term period; unemployment strengthens inequality of income and social stress, and besides the losses caused by disuse of resources, causes additional losses (reduction in investments), which is connected with political, psychological and criminogenic stress growth.

But the high level of unemployment is the result of existing negative and positive incitements in economic development. Firstly, the first is connected with drawback of state regulation of the market and economy. Economy may be in conditions of macroeconomic equilibrium, but not in macroeconomic stabilization conditions during unemployment; that is characterizing defect of the market the correction of which is possible only with government correct interference. For this it is important that the government has the mechanism of employment regulation and, accordingly, developed infrastructure. The mechanism of employment regulation should include legal bases, regulating instruments, systems of indicators, event system of regulation, appropriate regulating authorities.

Unemployment connected with current positive incitements in economy is also connected with the change of economic structure and introduction of innovations. Government interference is important in both cases to reduce unemployment level. We suppose that the government should pursuenot the policy that provokes inflation processes but innovations stimulating policy that will increase the volume of productivity, owing to extend of the old one and development of new economic spheres.

Termsconnectedwithunemploymentcategories

Consideration of unemployment problems is firstly connected with new thinking of determinants connected with unemployment and bringing of specific accuracy in them. Let’s examine some of them.

“Unemployed“

We think it incorrect when the general accent in the definition of the word “unemployed“ is made on the decision of person - whether he wants to work or not.The existence of such requirement in the definition is conditioned by the fact that the status of unemployed is determined by the state of developed country and according to this status a person should have a will to work. Otherwise, he will not receive such status and, therefore, will not be able to receive an aid. The procedure of receiving of unemployment status has various difficulties in different countries. For example, it is easier in USA rather than in Japan etc [Dolan 1988].

If we talk according to general economic interests, then it is clear that while establishing the quality of use of labor resourc - the most valuable resource of the country, it is very unfair not considering millions of unoccupied people, capable to work, as unemployed and leaving them in shadow. It decreases artificially the quantity of unemployed and decreases the effectiveness of state policy pursued in direction of unemployment. It is true that according to the legislation, the person has the liberty of labor, but it does not mean that the person who is physically and mentally healthy who does not have the desire of work (caused by his own desire or state reason) does not damage the society.

The part of the scientists has the same opinion. For instance, Edwin Dolans and David Lindsey suppose that it is a paradox that quite a big part of “unemployed” people cannot enter the category of unemployed, that millions of people that do not try to find a job – is not considered during the determination of the labor power [Dolan 1988].

According to the explaining, the person who has the will to work, but is of a retirement age is considered to be unemployed. Such people should not be considered unemployed as in frequent cases they cannot find a job because they are incapacitated. Including such people in the list of unemployed, only because they want to work, increases artificially the level of unemployment.

The question about the people who have a part-time job is also disputable. The official statistics consider them occupied while a part of scientists has another opinion about that [Chikava 2012]. Sure, this opinion of scientists should be taken into consideration, but, maybe, the size of income should be considered as well - a person should be considered unemployed when the income is lower than the poverty level during part-time job.

In our point of view, a person should be considered unemployed who is at working age, is not occupied with useful activity (does not work, does not study, is not in obligatory military service and is not occupied with family business), is not registered in specialized institution, is not a disabled person or retired. This explanation is based on legal, economic and moral norms and not on separate person’s desire whether to work or not.

If we take into consideration this explanation, according to the desire of a person to work we should diversify active (who searches a job) and passive (who does not search a job) unemployed. Disabled and retired persons should not be in any of these categories. If they find a job, then they will be in the list of employed.

According to offered explanation, the level of unemployment is determined by the number of the unemployed (active and passive) in relation to total number of employed and unemployed people (active and passive), expressed by percentage.

As the result of above offered definitions, some difficulties of calculation connected with unemployment will be liquidated, as the statistic indicators connected with unemployment and the volumes calculated on its bases are probabilistic because of the following circumstances: statistical indicators may be changed quickly, as it depends on the will of a person to work or not. In the case of the method offered by us this drawback will be liquidated, as the quantity of unemployed people will not depend on the desire of a person, it will depend only whether the person begins to work or not.

All invalids and retired people might want to work, but cannot find it for years because their human capital quality does not meet the existing requirements. They are not able to develop new specialization and improve professional skill. Because of that, the quantity of unemployed will remain increased for years and the reduction will be impossible. In case of the method offered by us this drawback will be liquidated, as the invalids and retired people will not be included in the quantity of unemployed people, in spite of the fact that they have the will to work or not. This category refers to the group of non-economic population (in the case of unemployment), or to the group of active economic population (in the case of employment).

In frequent cases, the data of both employed and unemployed people is not the subject of the statistic calculation. For example, a big group of people work till the working age or they are occupied with family business, also people employed in shadow economy. Unemployed people, who are not registered, will not be in the list of unemployed people etc.

For liquidation of these defects it is necessary to improve and toughen the system of employed and unemployed people. The government should register unemployed population. An unemployed one should register his attitude in connection with unemployment (whether he searches or no the job). Certainly, this does not mean that we should make a person to work if he does not have the will to do that. But, the government should have data about the labor potential that the country has.

“Labor power”

As for the term – “labor power”, it is not used in practice, but in economic literature it has double meaning. One thinks that it is a special commodity (ex., Marx and his followers), another’s opinion is that [Big economic… 2008; Dornbush 1997; Linvud 1996; Mankiw. 2015; Sachs 1993; Dolan 1988; Edwin 1994] he is the part of the society who works and searches for a job, that is, economically active population.

We suggest that consideration of labor power (as the unity of physical and mental abilities of a person) as a commodity is not correct, as the commodity is a product, which is made for sale and after selling it changes the owner. In the process of production, engagement of a person and not selling of his ability takes place, as the owner of the ability is still this person and his ability increases in most cases instead of decrease. If the ability is being sold, then its owner should be also sold. Such relations were at slave era. It is impossible to imagine such relations in modern times. Therefore, an employer does not sell his capability; he uses it in the process of production (works) at the benefit of the owner, for what he takes a salary.

As for the expression of an ability of a person, in modern literature exists the term- “human capital”, so it is more applicable to use the labor power only for the second concept, i.e. as the quantity of employed and unemployed people.

“Natural level of unemployment”

The natural level of unemployment in literature is equal to structural and frictional unemployment level [Big economic… 2008; Mankiw. 2015; Rumantseva 2008; Schumpeter 2007; Dolan 1988]. We suggest that the natural level of unemployment is the level of unemployment when economy is in natural situation and even in the case of its state regulation strengthening, it is impossible to reach less importance of the level of unemployment.

It is true that, the reason of natural unemployment is structural and frictional unemployment, but frequently the level of structural and frictional unemployment might not coinside the natural level of unemployment (that is, the possible lowest level of unemployment), that is, be more than that.

Some of the countries share this idea, especially in Sweden where it is supposed that the level of unemployment above its specific little importance should not be considered as the natural typicalness of market economy [Sachs 1996].It is true that recently the idea in Sweden was divided in two parts, because of luxurious fiscal policy of preservation of unemployment at a low level, as big governmental programs had been implemented for reduction of structural unemployment [Dornbush 1997],but, practically, the natural level of unemployment remains low and it does not exceed 6% (although, earlier, when more strict policy was pursued , the natural level of unemployment was till up to 3%), while in many developed countries it fluctuates from 5% up to 10% [Dornbush 1997].We support the idea that the preservation of the level of unemployment on the low level is possible when appropriate economic policy is followed [Linvud 1996]. We suggest that the realization of expensive programs in this direction is justified, as the unemployment besides pure economic losses is connected with a lot of other negative events, including the most keen problem of social and psychological tension that finally, has a negative impact on economic development.

Losses caused by unemployment

In literature there is generally discussed only the losses caused by cyclic unemployment, as natural unemployment is identified with structural and frictional unemployment. We suppose that the losses caused by structural and cyclic unemployment should be distinguished from each other. Production capacity exists during cyclic unemployment, but it is unused, therefore, there is no need in new investments for decrease of cyclic unemployment, while the creation of new fixed capital is obligatory in the country to reduce structural unemployment.

Unemployment damages different sections of populationin different ways. Unemployed people who lost their salaries suffer from losses; state budget - as the result of reduction of income and the issue of relief; producers loss benefits; gross national product decreases etc. Sure, it will be a mistake to calculate total loss as the result of summing up these losses and it will cause double calculation asGDP presents the volume of all losses.

Losses of cyclic unemployment are determined according to the well-known law of Okun. But, this law is based on empirical examinations, on the example of USA, and this was comparatively appropriate for this country or, at the best, for similar countries and not for countries with distinguished empirical data (including Georgia).

It is worth to mention that the law of Okun does not take into consideration several positive effects of unemployment (for example, existence of free time, more possibilities to make rational decisions).It also does not take into considerationlosses caused by the result of worsening of social political and criminogenic situation due to unemployment, human capital reduction. Although these losses mainly caused by the decrease of investmentsare quite important. Unemployment strengthens inequality of income and social tension, in addition to losses caused by non-use of resources, and causes extra losses that are connected with growth of political and criminogenic tension.

Economic growth and the level of unemployment

We may often meet the conclusion in literature and practice that the only way to reduce unemployment is the acceleration of the rates of economic growth, but, in reality, in specific intervals of the growth rates and in specific conditions the level of unemployment does not reduce, it may stay the same or even grow. Why? - Because of the growth of structural unemployment that is caused by the growth of labor productivity, as the increased quantity of products requires the less quantity of employers. For easiness, let’s suggest that 10 employers work in economy, the level of unemployment is 8%, the volume of output is 100 GEL. So, the labor productivity comprises 10 GEL. Let’s imagine that the labor productivity due to innovations increased by 10%, that comprised 11 GEL. In conditions of invariability of employers’ quantity, the volume of output will be 110 GEL, so it will increase by 10%. Therefore, in given case, 10% increase of the productis necessary for unemployment to stay at the same level. If we increase the volume of production by less than 10%, we will need not 10 workers, but less, which will cause the growth of unemployment level. For reduction of the level of unemployment, the growth of output must be more than 10%, that means that innovations should be accompanied by the extension of production. That is why, togather with innovative processes, the reduction of the level of unemployment takes a lot of time.

It is true that in some cases innovations cause unemployment, but in historical aspect the decrease of the level of unemployment happens due to innovations, even in the conditions of significant growth of population, increasing marginal product of labor [Mankiw 2014]. Innovation should be accompanied by the extension of the production achived by innovations, resulting in the extension of old spheres of production and the development of new one, the increase of demand etc.

Certainly, another business is the cycling unemployment. This time workplaces exist and in conditions of economic growth there is no need in any additional investments. The level of unemployment reduces without attraction of new investments.

During friction unemployment we should distinguish the unemployment caused by the result of the growth of population (when a young becomes capable to work or graduates and is unemployed) and the unemployment caused by the loss of the job at own will or forcedly (but not because of production slowdown).In first case we superficially have to deal with structural unemployment, and in the second case with the same case of the cyclic unemployment, as in the first case implementation of new investmentsis necessary, while in the second case - there is no need in it.

Employment

The first event of employment regulation is institutional structuring of labor market that means the existence of labor exchange, governmental service of employment and migration, labor exchange and appropriate infrastructure. This will make it possible to calculate free workplaces (vacancies) and register unemployed people (passive and active); consult unemployed people on issues connected with employment; grant allowances to unemployed people; professional training and retraining of citizens; evaluation of labor market situation (economic and non-economic, establish of the quantity of economically active and non-active population etc.); register labor emigrants and migrants, prepare appropriate information etc.

Besides institutional provision, with the aim of unemployment reduction, some measures should be taken to reduce unemployment in the conditions of stabilization of prices and not in the conditions of rise of inflation. The economic policy should have a privilege, which will move economy not to Phillips curve, but will cause the movement of Philips curve to such points where the level of unemployment reduces while the general level of the prices is unchangeable or increases lightly. This can be achieved by the stimulation of such innovative programs (innovation policy directed towards the decrease of unemployment), which provides approximately equal rate of increase of aggregate demand and supply. In other words, rate of growth of volume of production should be ahead and the rates of wage growth should be behind the rates of growth of labor productivity, until the real level of unemployment is not equal to its natural level. This will be achieved by the extension of existing fields of production and service and development of their new spheres.

Conclusion

Unemployment has a huge influence on economic development that is expressed in the following: unemployment (especially long-term) reduces human capital magnitude of the society, as the qualification level of an unemployed person, physical and mental abilities are being reduced gradually; as there are losses of output, the volume of savings is being reduced that cuts down investments, including investments in innovations during unemployment. Financing of scientific research projects are also reduced as by the government as well as by private sector, which has a negative impact on economic development processes not only in short-term, but also in long-term period; unemployment strengthens inequality of income and social stress, and besides the losses caused by disuse of resources, causes additional losses (reduction in investments), which is connected with political, psychological and criminogenic stress growth.
We think it incorrect when the general accent in the definition of the word “unemployed“ is made on the decision of person - whether he wants to work or not.The existence of such requirement in the definition is conditioned by the fact that the status of unemployed is determined by the state of developed country and according to this status a person should have a will to work.we should diversify active (who searches a job) and passive (who does not search a job) unemployed. Disabled and retired persons should not be in any of these categories.
As for the expression of an ability of a person, in modern literature exists the term- “human capital”, so it is more applicable to use the labor power only as the quantity of employed and unemployed people.
It is true that, the reason of natural unemployment is structural and frictional unemployment, but frequently the level of structural and frictional unemployment might not coinside the natural level of unemployment (that is, the possible lowest level of unemployment), that is, be more than that.
Losses of cyclic unemployment are determined according to the well-known law of Okun. But, this law is based on empirical examinations, on the example of USA, and this was comparatively appropriate for this country or, at the best, for similar countries and not for countries with distinguished empirical data (including Georgia).It is worth to mention that the law of Okun does not take into consideration several positive effects of unemployment (for example, existence of free time, more possibilities to make rational decisions).It also does not take into considerationlosses caused by the result of worsening of social political and criminogenic situation due to unemployment, human capital reduction.
It is true that in some cases innovations cause unemployment, but in historical aspect the decrease of the level of unemployment happens due to innovations, even in the conditions of significant growth of population, increasing marginal product of labor. Innovation should be accompanied by the extension of the production achived by innovations, resulting in the extension of old spheres of production and the development of new one, the increase of demand etc.

Literature

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Rumantseva Е. Е. 2008. New economic encyclopedia. М., INFRA-М.
Sachs Jeffrey D. LarrainFelipe B. 1993.Macroeconomics in the Global Economy. Prentice Hall;1 edition
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