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Write a summary for relationship between unemployment and GDP as a measure of a country's wealth.
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The essay discusses the relationship between unemployment and GDP as a measure of a country's wealth. It explains that while unemployment is often seen as a negative thing, it can also be seen as a positive thing if the unemployment rate is low. The essay goes on to explain that GDP is a better measure of a country's wealth than unemployment, as it takes into account more factors.
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London: Cousseway press
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Another
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“What can economists learn from happiness research?” Journal of Economic Literature
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Another
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Heinemann Educational: London
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“Phillips Curves
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Another reference?
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“The Relation between Unemployment and the Rate of Change of Money Wage Rates in the United Kingdom
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Cambridge: Cambridge University Press
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Another reference?
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Economics for Business
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essay for relationship between unemployment and GDP as a measure of a country's wealth. Exapnd on the summary above.
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##UK Unemployment Trends
Most people have viewed unemployment as being an indicator of economy showing the number of individuals in a particular economy who have a will and ability to work but they have no jobs. If a person is found in this situation, then that person is unemployed. Individuals who lack the will of working for any reason are not categorized as being unemployment, but they are just economically inactive.
Economists have concluded that in case the levels of unemployment are too high in an economy, then that particular economy is just struggling to maintain its population. Under this situation, then the economy is not utilizing its resources in the best way possible.
From the graph of UK unemployment 1950-2001, in 1950s and 1960s, unemployment rates in UK were very low. According to Politics.co.uk par1 this amounts to about 3% on average. This was attributed to what is referred to as Post-war boom.
During Second World War, those individuals who served as servicemen in military were promised to be given full employment after winning. At this time, there was no government that was ready to break this promise.
It has been stated that, advancement in technology along with international trade that was stable and “the success of Keynesian economics and the stability of the Phillips Curve created a situation which did approach full employment – although of course, at that time the majority of women remained in the category of the economically inactive” (Politics.co.uk, par. 6).
Moreover, in 1950s to late 1960s, the interest rates were very low; there were lots of incentives for those carrying out research and development as well as on general investment. As a result, there were many investments springing up month after month due to the above mentioned escalator mechanisms. Though this strategy worked in those times, in the current times the strategy is ineffective.
This is because, in the current times, this strategy will make government budget to increase, the government has no additional sources of revenue. In case the government tries to increase tax, it will affect consumption as well as investments negatively. As a result, it will be very important for the government to raise PSBR with the aim of countering this problem.
On the other hand, the current UK government can increase tax, and ensure that it’s spending also increases at the same rate. This balanced budget multiplier will helps the government to increase its national income in general. This is because not all extra money paid inform of tax will be spend. This extra tax will be as a result of increased investment and consumption.
In 1970s, unemployment rates in UK started to increase. This has been attributed to the collapse of orthodox boom. This was caused by the energy crisis in 1973, and the ‘generated stagflation’ in 1979. These impacts resulted to high inflation rates as well as high unemployment rates in Europe. In 1972, unemployment rates topped a million for the first time in history.
This is because; labours through unions were demanding more salary rates. In around 1979, there was a situation referred to as ‘winter of discontent’, where even grave diggers protested pay freezes by calling for a strike. At this time, unemployment was a 1.1 million. This was the time the Labour party was swept out of power by the Conservatives in the name that the labour party was not doing anything to deal with the situation.
When conservatives were in power, it was thought that unemployment rates will decrease in 1980s, but to peoples’ surprise, unemployment rates escalated further. At this time, the number of unemployed people clocked 3 million, which was about 12 percent of the population that was working.
However, this was just an average because in some parts of the country, the number was even higher. For instance, in the northern parts of Ireland, unemployment clocked 20 percent of that population that was working. Moreover, those areas that declining industries dominated, for instance coal mining industries, unemployed population was even very large.
Early 1990s experienced a fall in unemployment percentage. And by late 1990s, that is 1999, the number was still bellow 2.2 million individuals. This kind of trend went on till 2005, with official figures putting the rate at around 1.398 million individuals. Nevertheless, in the last two years of Blair’s era, unemployment rates went up again.
In 2008, when Gordon Brown was dealing with global recessions, figures of unemployment clocked 1.79 million, which has been considered as being the highest in the last decade. In May 2010, by the time the coalition government was coming to power, unemployed population was clocking 2.5 million people.
However, the current Prime Minister, (David Cameron) has promised that unemployment rates are expected to fall in the coming years under his government. He said, “At the end of this Parliament unemployment will be falling” (Politics.co.uk par. 4)
Moreover, there was a fall in unemployment rate in early 1990s because most industries moved from manual production to technological production. It is clear that, though there was slight unemployment, but those who remained working ended up receiving higher salary rates as a result of increased production, hence increasing aggregate demand for money.
Moreover, increased technology led to lower production costs; hence UK commodities gained lots of competitive advantage on global market, hence increased government revenues through tax. These two effects led to unemployment rate reduction in UK (Anderton 1993, 56).
However, according to civil societies, unemployment has been rising month after month. For instance, between June and August 2011, unemployment has increased to 2.57 million individuals, which has been considered as being the highest since 1994.
To explain this trend, it has been shown that in the entire history, policy makers have been holding a view that macroeconomic advantages of having high unemployment rates are much more as compared to its negative effects on the economy and social openness.
This is what happened in 1980s. On the other hand, the government has not been having a will to allow high unemployment rates of unemployment as a result of its effects on social environment, the economy, as well as public costs.
Moreover, figures of unemployment in UK just explain a partial story of what is happening in UK. This is because, for many years, there have been structural differences among UK regions making some parts of UK to experience higher percentages of unemployment as compared to others.
For instance, unemployment in Wales and Scotland is much higher as compared to other developed areas like London and South East (Curwin & Slater 67). This has been due to the fact that, there are some regions having fewer employers as well as business closures like the closure of mine industries in the 1980s.
The recent one has been in Birmingham, where Longbridge plant was closed down. This issue has brought lots of devastating situations in such areas.
The figures of unemployment in UK have been rising as a result of other complexities. For instance, “prevalence of unemployment amongst ethnic minorities, women, disabled people, young people, and people who have been unemployed for long periods of time” (Anderton 243), all of these people are grouped together, they make the current figure to be much high.
However, this group in early 1950s to early 1970s were still being considered as inactive, hence were not considered as being unemployed. However, the situation has changed since 1980s, as they also add up to the unemployed population.
Moreover, according to Begg, Fischer & Dornbusch 126, during election times like in 1997 and 2001, the number of unemployed people goes down, but this might not be true, as a result, the afterwards years the unemployment rates increases again.
This strategy was used by Labours party to gun up votes. This strategy has been successful due to the fact that there are two principles of measuring unemployment, namely Labour Force Survey and the Clamant Count. As a result, in some situations, Labour Force Survey has been used as it has the ability to minimize unemployment number for political reasons.
Moreover, in 1980s and around 1994, UK experienced higher numbers of unemployed individuals. This is because many workers were moving from one job to the other. According to Anderton Allan 78, most people were moving from military jobs to other jobs, and the period between the two jobs, was being considered as being unemployment.
In addition, this was the time workers were demanding higher salary rates, as a result, most workers were reluctant pick the first job they were being offered.
Some reasons which led to this reluctance include occupational and geographical immobility, which made some areas to experience higher unemployed rates as compared to others; people were also having higher expectations for higher salary rates, hence many people needed well paying jobs, hence people were reluctant in picking jobs that offered low salary rates (Grand & Vildler 200).
However, in around 2003 to 2008, the government did much to reduce this reluctance among people. For instance, the government introduced working trials where by individuals were being given temporary jobs to ensure that in case one gets satisfied with it, then he/she picks it up.
In case one is not satisfied, then is moved to another temporary job. Other measures that had been implemented by the UK government to reduce this problem include making some improvements in training and lowering people’s expectations by lowering the working hours. Though these were difficult measures to implement, but they really helped the UK government in reducing unemployment due to reluctance.
Between 1994 and 1996, and between 2008 up-to date, UK has been experiencing and is still experiencing real wage unemployment. This is because salary scales had been raised to a level that some industries were making losses hence closed down. Other factors which led to real wage unemployment are setting minimum salaries and high levels of benefits.
Moreover, these trends can be explained by Kondratieff wave, which provides prediction of economy success and economy failure as well as world events. According to this theory, unemployment exists for about 10 years due to industrial and trade falls. However, after that, trade and industries picks up again leading to lower employment rates.
Moynihan Daniel & Titley Brian 3 has argued that in early 2000, unemployment rates in UK were very low because the government as well as industries had minimized real wage unemployment. In doing this, the average real wage had been levelled to Market-clearing wage. To ensure that labour accepts this wage rates, inflation rates in UK were kept very low.
As a result workers salary rates were kept constant, but in real sense they were falling in value. However, this strategy worked till 2007 where workers started realizing the effect of falling value of their salary rates. As a result, in 2008, the worst effects of inflation were experienced.
For instance, commodity prices went higher as well as exchange rates. To date, this has not been dealt with, as workers are still demanding higher salary rates as unemployment rates goes higher.
It is due to high unemployment rates that led to the public demonstrations against the coalition government in mid 2011. This unemployment has been as a result of UK economic recession and high population. The strategy to deal with this situation has been very difficult in the current complex labour market.
This is based on the fact that, though the government has been trying to ensure that workers accept lower salary rates, but due to trade unions salary rates have remained artificially high.
Sloman, Hinde & Garrett 45 argue that, the main issue that is leading to high unemployment rates in UK is not really lack of job opportunities, but many employers are not willing to take those who have been unemployed for a long period of time, though this group has a will to accept employment at a lower salary rate.
Employers claim that such people lack up-to date skills and experience. In dealing with this, though the Coalition government has tried to initiate retraining programs, but it seems it is not working to employers’ satisfaction.
##Using Philips Curve to Explain Unemployment in the UK
The curve representing the relationship inflation and the unemployment rate is referred to as the Philips curve. According to this curve, unemployment is inversely proportional to inflation (Phillips 283).
This curve can be used to explain unemployment in the UK because by the time unemployment is high in the UK, there have been chances that wage rates increases slowly, and when unemployment is low, UK has been experiencing rapid increase in wage rates. This was experienced in 1960s
This is because in 1960s, unemployment rates were low, the labour market in the UK was very tight, and as a result, faster industries ended up raising wage rates with the aim of attracting the scarce labour.
However, during high unemployment rates, this pressure is abated. According to the classical view of inflation in UK, inflation is as a result of money supply alteration. In case money supply is high, commodity prices also goes higher.
Most economists like Phelps 265 have challenged the theoretical understanding at the height of the Philips curve. It has been observed that employers and workers who are well informed and rational concentrate majorly on the “real wages—the inflation-adjusted purchasing power of money wages” (Phelps 265).
As a result, real wages are usually adjusted with the aim of adjusting labour supply to ensure that it is at equilibrium with the labour demand. As a result, unemployment will not be associated with real wages (natural rate of unemployment).
In addition, the Philips curve calls for the governments to start trading high inflation rates with the aim of achieving lower unemployment rates. This is a theoretical advice that no government will ever aspire to borrow.
Take it for instance that unemployment rate is at a natural rate and real wages are also kept constant in UK. At this time, workers expecting certain price inflation end up demanding higher wages to prevent their purchasing power erosion. In case the UK government uses monetary in an attempt to lower unemployment bellow its natural rate in the region.
There will be an increase in demand which will make industries to increase prices at higher rates as compared to what UK workers anticipated. Since prices will be higher, companies will start having more revenues hence taking more employers at the old salary rates and even might decide to raise such salary rates a little bit.
For a short period, employees will be suffering from what is referred to as money illusion, hence they will supply more labour since their salary rates had increased, leading to unemployment rate drop. However, such employees will not realize that there has been erosion in their purchasing power because prices have increased at a very high rate than what they anticipated.
However, as time goes by, workers will start anticipating higher price inflation. As a result, they will start supplying less labour but still insist on the wage increase to keep up with price inflation rates.
This will lead to a situation that “the real wage is restored to its old level, unemployment rate returning to natural rate. But the price inflation and wage inflation brought on by expansionary policies continue at the new, higher rates” (Sheffrin 56).
This analysis can be of great help in distinguishing ‘short run’ and ‘long run’ Philips curves. As a result, given the fact that average inflation rates will remain constant in the UK just as what happened in 1960s, and then it is true that inflation rates and unemployment will have an inverse proportionality.
However, in case inflation rates will change regardless of the direction, particularly when decision makers try to lower unemployment rates below its natural rate, after sometime, unemployment will come back to its normal state as inflation rates remain high. This means that after labour has had enough time to adjust, natural rate of unemployment will withstand whatever the inflation rate.
This short run and long run relationships have been combined to mean ‘expectation-augmented’ Philips curve. From this, it is clear that. “the more quickly workers’ expectations of price inflation adapt to changes in actual rate of inflation, the quicker unemployment will return to natural rate, and the less successful the government will be in reducing unemployment through monetary policies” (Friedman 5).
This issue of ‘expectation-augmented’ was experienced in most countries in 1970s, where countries experienced both high inflation as well as unemployment. According to Philips theory, such state will never happen. At this time, rates of inflation rose from 2.5% in 1960s to about 7% in 1970s. On the other hand, instead of unemployment rate dropping, it increased from 4% to about 6%.
This made most economists to accept the principles presented by the analysis of Friedman and Phelps. All these imply that after price inflation, employees and employers start considering inflation as a whole.
These considerations will “result to employment contracts that increase pay at rates near anticipated inflation, Unemployment would then begin to raise back to its previous level, but now with higher inflation rates” (Phelps 268).
Friedman and Phelps argued that, there as a certain rate of unemployment which when maintained, unemployment rate and inflation rates will be compatible. This rate is what many economists have referred to as “non-accelerating inflation rate of unemployment” (Friedman 10).
##GDP as A Measure of How Well-Off a Country and Its People Are
In most scenarios, GDP has been used in measuring market value of all products and services that have been produced within a particular country in a given time. It is considered as being the most appropriate way of looking at the economy performance of various countries.
However, GDP accounts for some things which are not helpful in assessing well-being of the country population. Such parameters include “depreciation, income going to foreigners and regrettable like security expenditure” (Layard 126).
GDP was not meant to measure how well-off a country and its people. The main objective that led to the development of GDP is measuring market value of final services and goods that are produced in a particular country. In general, GDP has four major shortcomings when used in measuring how well-off a country and its people. First of all, GDP encompasses depreciated capital replacements.
However, depreciation does not contribute to peoples’ welfare in any way, in addition, the process of replacing old capital means that there is nothing that has been happening. From the chart, it is clear that GDP does not help people in any way; instead, it goes back to the replacement of physical capital.
Another thing is that, GDP is used in measuring income that is produced within country, but it does not consider people’s income in that country. There is there are some income which do not go into the pockets of the country citizens, but in the pockets of foreigners.
Thirdly, due to the fact that GDP only considers monetary transactions, it does not put into consideration other activities that are of more value to the country’s people, like children. The measure also does not consider the value of leisure time that people spent with their families or relaxing with friends.
This is a very important parameter when measuring how well-off a country and its people. It also ignores the significance of clean and quality air and water. As a result, any important measure of well-being of citizens in a particular country has to consider the above stated parameters.
Last but not least, GDP accounts for a lot of features that not in any way care for peoples’ well-being. For instance, in case earthquakes or hurricane comes and destroy the entire region, the efforts input when reconstruction process is taking place is usually considered as being a boost to GDP. This may even count when the efforts are directed towards replacing something that existed previously.
Moreover, costs incurred when preventing crimes as well as setting security measures adds up to the country’s GDP, but this expenses are incurred just with the aim of creating a peaceful environment.
Nevertheless, medical expenses incurred in the process of dealing with health effects which arises as a result of pollution also boost GDP. On the other hand, if this reasoning is taken to the extreme, then basic needs like food and clothing are not included in GDP. As a result, there is need for other measures.
##Alternative Measures
According to Frey & Alois 43 and Lyubomirsky et al.120, GDP cannot be used in measuring welfare of people. As a result, he proposes ‘Measure of Economic Welfare’ that includes household services values and leisure to GNP. It minuses capital cost consumptions, as well as bad things like pollution and police services in dealing with crimes.
It is true that, “A very comprehensive and thorough Index of Economic Well-Being comes from the Canadian Centre for the Study of Living Standards” (Frey & Alois 409). This measure considers the consumption of both the government and the private sector, though it ignores household work. It also considers the human and physical capital that is owned by the residents of a country.
In doing this, the measure puts into consideration stocks of all productive resources that can be managed sustainably to ensure that they can utilized by the coming generations. Thirdly, this measure considers inequality as a Gini coefficient as well as the intensity of poverty.
Lastly, this measure considers aggregated components of security like rates of divorce and unemployment rates as well. In determining people’s well-being, a weighted average of the above stated parameters is calculated.
From the table provided, Norway is seen as having the highest economic welfare amongst 28 countries provided. However, though Sweden is considered as being the second, but based on GDP, it is number 17. As a result, this ranking greatly differs with the ranking based on GDP. As a matter of fact, this system favours those countries having high income levels, high equality and low levels of insecurity.
There are other methods which includes more measures of human welfare. It is clear that such methods consider wealth, security consumption, and equality among other parameters. As a result, these measures include other parameters as compare to the previous method.
They are based on the fact that “We have failed to see how our economy, our environment and our society are all one. And that delivering the best possible quality of life for us all means more than concentrating solely on economic growth”( Layard 125).
Amongst those methods, ‘The United Nation’s Annual Human Development Index’ is the best known, though it is considered by many as being very narrow. This Index puts together life expectancy levels, education as well as GDP in measuring how well-off a country and its people are.
This method is not far from the Measure of Economic Welfare because, it places Norway in the first position, followed by Sweden. However, this is because of higher education levels in such countries. However, countries like China, India and Ireland have gained more because of their high GDP.
Whoever, the most comprehensive method of measuring how well-off a country and its people are is ‘Weighted Index of Social Progress’ appreciated as WISP. The index calculated in this method considers many dimensions of people’s well-being.
It looks at “income, education, health, role of women, environment, social peace, diversity and welfare – although data limitations admittedly lead to the inclusion of some peculiar measures” (Kahneman et al 133). However, in ranking, this method does not differ greatly from The United Nation’s Annual Human Development Index and Measure of Economic Welfare.
This is because, though the two placed Norway as being the first, this method places Norway in the third position bellow Sweden and Denmark which were slightly below Norway in the previous methods. However, the rankings from these methods differ greatly from the ranking based on GDP.
Moreover, A Happy Planet Index (HPI) on the other hand considers life expectancy in a country apart from looking at their happiness without environmental destruction. It puts data collected from life expectancy, life satisfaction along with natural resource like energy consumption.
This index differs greatly from other methods as according to it, Vanuatu is placed in the first position. This is due to their environmental conservation. Countries around the equator are usually favoured by this method. It is used mainly in determining best destinations for holidays (Danziger & Taussig 501).
Measure of Domestic Progress is another method developed in UK with the aim of measuring its welfare. It is stated that “From economic indicators subtract social costs like inequality, accidents; environmental costs and the loss of natural resources. The overall result is an indicator that peaked in the mid-1970s, declined until the mid-1980s and has not yet regained that peak” (Frey & Alois 410).
Genuine Progress Indicator is just like Measure of Domestic Progress, but it considers individual consumption, the households work value, net fixed investments, and consumer durable values. Te index also puts into consideration commuting costs, environmental destruction costs and costs of depleting finite resources.
The indicators of well-being should show a wider picture of the society state as compared to what GDP provides. However, such methods have not explained how satisfied people are. As a result, the process of measuring happiness ought to take a different approach as compared to the indicators or methods described in the previous section.
According to the 2004 survey, “Swedish said they were very satisfied with the life they lead – the highest share in the sample. Only 17% of Germans and just 4% of the Portuguese felt the same way, as chart 11 shows”(Kahneman et al.130). In the past 15 years, studies have indicated that though per capita income has increased, satisfaction with life has not changed greatly.
Research in Europe has indicated that happiness in this region does not depend on per capita income, but on other factors like football matches and results. For instance, in France, most people were happy in 1998 the year they hosted the world cup and won it.
Moreover, in Europe, individuals get satisfied with life if their compatriots are trustful. As a result, it is very difficult to manage life satisfaction sustainably in Europe. So basing on income levels alone can’t explain happiness in Europe.