The predominance of unemployment rates varies across geographical spreads and is primarily affected by the external business environment, aggregate demand in an economy, the prevalence of labor unions, governmental policies, minimum wage laws, individualistic skillset, fluctuations in the business cycle, and personal factors.
Low unemployment is a desirable situation for governments and economies because when people are employed for productive uses, economic activity spikes, increasing the circular flow of income, standards of living, GDP, and international competitiveness. In such a scenario, people will be better off and economic welfare higher, as the economy is advancing and resources are being allocated efficiently.
On the contrary, the prevalence of widespread unemployment can widen income inequalities between the rich and the poor and be straining for governments as they will have to allocate funds for the support and welfare of those unemployed. Additionally, due to the slump in production due to inefficient utilization of human capital, people will be worse off, as the flow of wages (factor payment for labor), and thus spending, will reduce. A fall in aggregate demand will have negative repercussions on the overall production of goods as producers are likely to shrink production. As a mechanism to cut costs, workers who are forward in the supply chain may be made redundant, further having implications on aggregate demand in the country. This negatively spiraling loop is an application of the negative multiplier effect, as the change in demand for one good has consequences on production and employment across different industries and vertical chains.
Therefore, to mitigate the effects of involuntary unemployment, labor markets need to be more resilient, flexible, and adaptive to increase the occupational and geographical mobility of labor. Governmental intervention intends to accentuate labor laws and stabilize the economy.
Governmental intervention becomes increasingly potent in times of economic. This is because the assumption of ‘hysteresis’ propounds that if high unemployment persists at present, it may continue in the future, even when favorable economic circumstances return. During recessionary phases, the real value of income erodes, so employees tend to demand higher wages amid the economic turmoil and job uncertainty. This leads to a wage-price spiral which is difficult for market forces to reverse, especially in the short run. To alleviate the impact of cost-push inflation within the firm, workers are made redundant.
In this case, the government can undertake public projects to create employment opportunities. Additionally, improving access to job vacancies and training opportunities can be used to correct the information failures. Other political measures include expansionary fiscal and monetary policies to boost demand and employment. Enforcing these measures in correspondence with supply-side policy instruments like providing training and subsidies, provides a long-term solution to extenuate the problem. Likewise, the direct governmental provision in the form of public sector employment initiatives or setting up Special Economic Zones (SEZs) in underemployed areas, helps in leveraging labor resources.
Nonetheless, governmental assistance in the form of lucrative unemployment benefits lowers the incentive to find work and increases the dependence on the government. If deficit financing is used to fund this, then there can be fiscal problems due to widening government budget deficit over the long run.
In certain circumstances, deregulation by government authorities can give producers a clear indication of market signals and incentives. Moreover, restricting the power of trade unions will ease labor market rigidities.
The self-centric approach in seeking employment invokes individuals to take independent steps to advance their professional careers. People tend to take the sole responsibility for uplifting their livelihood and financial conditions. This allows them to be more open and flexible to varying working patterns. Reallocation of human capital across geographical locations and from primary to secondary industry also implies longer vertical chains and greater value-added, making people better off. They can also seek freelance work to generate a temporary source of income, thus reducing the incidence of prolonged involuntary unemployment.
The flexibility to leave a job and find another highlight a major component of the persistence of natural unemployment. To best suppress high unemployment, an amalgamation of government policies and a self-driven approach should be utilized.