Positive Effects Of High Unemployment In An Economy

Discuss the positive effects of hizk unemployment in an economy (20 marks) Unemployment defines people who are able, available and have been actively seeking for a job in the past four weeks and prepared to work within the two weeks. It is measured by JSA and LFS. One positive effect of unemployment is that firms would have a low cost of production this is because of the fact that there will be more workers available to work which means more competition between themselves to get the job and because of this they will be willing to work for low wages in order to secure the job. This therefore implies that firms will not have to offer higher wages which, in the short run is beneficial for them as they it will leave firms with more funds which can be used for investments. Furthermore, the fact that there are a variety of workers firms are able to select those who are more productive, offering various skills and have the ability to have a high real output. Overall, lower cost of production causes low inflation as price levels would decrease due to increase in aggregate supply and therefore in the long run it will increase international competitiveness. However, low skilled and deskilled workers are less likely to be highly productive as they may not have the knowledge and understanding about certain things. For example, some may not be able to use the equipment efficiently. As a result, fewer goods are produced at a low wage, which would not be beneficial for the firm for employing the worker at a low wage but in fact it would mean high average cost per unit produced which may not increase country's international competitiveness. In addition, unemployment lowers the power of trade unions as there are many people available for work. Therefore, it leads to a high bargaining power by firms in order to have these workers employed in their organisations resulting in the fact that negotiations would improve when discussing factors concerning workers such as working conditions and wages. Furthermore, the workforce is likely to be more flexible as they would be able to understand how to carry out certain tasks and use certain equipment. Therefore, as a result foreign direct investment would be attracted as workers are flexible and willing to work for a low wage. The more FDI the more the country benefits because FDI is an injection. This means that it adds extra money to the countries circular flow of income. Also, FDI creates more jobs, brings technology and skills from abroad which is beneficial as it could improve the productivity of the workforce and therefore increasing the real output. However, trade unions power is dependent upon the elasticity of the final product. If the final product produced by workers is inelastic, it will not lower the power of trade union. E.g, teachers, doctors and public transport drivers have relatively very high trade union power as compared to unskilled workers such as cleaners. Also, government labour acts protect workers hence employers can't just employ workers at below the NMW and poor working condition despite the state of economy and level of unemployment. Lastly, unemployment contributes positively in order to give chances to individuals to update their skills as short term unemployment is not a huge problem compared to long term unemployment. In addition, unemployment gives the opportunity for people to learn new skills either through education or a course such as learning IT skills. This is advantageous as it means that people are more likely to he occupationally mobile if they have a range of different skills. Moreover, in the long run unemployment can increase productivity because if they are able to spend so much time developing these skills which could be useful for them when they start work as they become more efficient therefore increasing real output and shift LRAS & PPF to the right. However, even if people become unemployed in order to improve their skills, the problem arises if training opportunities are not available, therefore leading to their period of unemployment not being any useful. Also, if training opportunities are available but unemployed people can't afford due to low/no income, it will not help them to improve their skills. In order to compensate this, government may need to provide free training or apprenticeship programs which will be additional constraint on public finance and then financial problems are likely to cur. Investing in these facilities may increase budget deficit, which is a negative impact for the economy. In conclusion, economy's main target is to achieve low level of unemployment instead of full employment as full employment can be inflationary, with less incentives to be efficient and higher power of trade union. Overall, I believe that a government should focus on lowering unemployment, raising the level of employment and especially youth employment. It is also vital to ensure that workers are not unemployed for longer time period due to hysteresis effects.