Unemployment

“MORE JOBS, MORE JOBLESS”

It has been observed recently, that unemployment in Germany has reached its highest level since World War II. This has caused a lot of anxiety to the German government. Although new working places have been created, unemployment remains high.

Unemployment is the situation when people of one country are willing, able and available to work at current wage rates but they are jobless and it is measured by the ratio of (Unemployed / Labor Force). If we imagine unemployment as a pool of people who seek work, then it seems to depend on the rate of inflow and outflow from this pool. Even if new jobs are created, the demand for labour increases with a higher rate. This is probably due to demographic changes or structural unemployment.

Demographic changes refer to the age limit when somebody is eligible for pension and the low level of infant mortality. Structural unemployment refers to the situation where there are jobs available but workers do not have the appropriate skills. In Germany, there are job losses at manufacturing, farming and construction sector but new jobs are created in the service sector. A worker of the declining sectors of farming for example, will not possess the necessary capabilities to find a job in the expanding service sector.

Another reason of high unemployment has to do with the phase of the business cycle. When economy is in recession, the level of consumption (C) in part of the households decreases. Firms will not invest and so the level of output and employment falls. This is called demand-deficient unemployment. The recession will force firms either to decrease the goodsÑž prices or to make workers jobless. By this way they will decrease the cost of production and maintain their profits. This situation is illustrated by the following diagram:

Above we clearly see that the AD curve will shift to the left because of consumption and investment decrease and so the equilibrium output will fall from Q1 to Q2 leading to unemployment. Also AS curve is inelastic in the short term and the decline of output in some industries will shift it to the left. Prices will remain stable in the economy.

As the cost of wages is an important part of the total cost of production and with the threat of new job losses the trade unions have agreed to a lower unit labour cost. By this way they hope that the demand for labour will increase and the aggregate supply (AS) will shift to the right leading to increase of output and the lowering of unemployment. Additionally new employees will have more income to spend. The level of aggregate demand (AD) is expected to increase and this will drive the economy out of recession. This situation is