Question

The situation is the worst economic crisis in Venezuela's history, and among the worst in the world since 2014. ... The crisis intensified under the Maduro government, growing more severe as a result of low oil prices in early 2015, and a drop in Venezuela's oil production from lack of maintenance and investment.

Explain all types of unemployment and link the current situation

Explain the concept of wage rigidity and unemployment, draw the diagram and link with the current situation of Venezuela

What types of unemployment are good for the economy and why?

Answer 1

In a general sense, unemployment refers to the phenomenon or situation under which an individual is without any current employment and is actively seeking but unable to find one. From a macroeconomic standpoint, the overall unemployment in any country or economy is usually measured as the unemployment rate or percentage. Now, the various prominent unemployment types commonly include Cyclical Unemployment, Demand-Generated Unemployment, Structural Unemployment, Regional Unemployment, Classical Unemployment, Frictional Unemployment, Seasonal Unemployment, and Voluntary Unemployment. Cyclical Unemployment is basically attributable to an overall reduction or decline in the aggregate demand(AD) in any country or economy which can be practically caused by any of the determinant/s or component/s of AD in the goods market and in this context, the Demand-Generated Unemployment is also impelled by the insufficient AD for goods and services in the economy thereby, creating lack of labor demand in the labor market. Structural Unemployment refers to the overall unemployment level created in any economy or country due to any long-term downturn or slowdown of some specific industries mainly because of adverse market conditions or circumstances. Regional Unemployment is mostly related to unemployment generated in any particular region or area of any country and usually confined to any particular industry or market. Classical Unemployment mainly occurs due to higher wages prevailing in the labor market or any labor market imbalance or discrepancy in general and Seasonal Unemployment occurs in the industries which are seasonal or operate only in a particular time period such as agricultural industry, tourism, construction industry, and so on. Frictional Unemployment essentially refers to the time gap or lag between losing a previous job or employment and the process or effort to find a new one. The temporary unemployment phase during this time is referred to as Frictional Unemployment. Voluntary Unemployment occurs when the employees or laborers are unwilling to work at the existing wage rate or salary in the labor market.

Now, in this instance, the decline in oil prices in early 2015 compounded with a massive decrease in the overall oil production in the country due to the improper and insufficient maintenance and capital investment collectively entail both reduction in AD and the overall or aggregate supply of oil in the domestic as well as international market, considering that Venezuela is one of the major oil exporters in the world. The oil price reduction and a decline in the overall oil production also mean less mobilization of productive resources and factor or inputs of production by the major oil companies in the country, including the domestic labor force, which would cause or contribute to the overall unemployment level in the country during the specified time period. It can ideally relate to the Cyclical and Demand-Generated Unemployment considering a reduction in the overall capital investment as one of the foremost reasons behind the decline in the country's oil production thereby causing a decline in the aggregate investment level and the AD in the country. Furthermore, unemployment specifically created due to the slowdown or downturn of the domestic oil companies can also conceptually correspond to the Structural Unemployment based on the observation that part of the unemployment is practically generated from an economic crisis within a particular industry in the country or the domestic economy.

The unemployment due to rigidity in real age refers to an imbalance of inefficiency in the labor market under which the relatively high real wage creates excess labor in the market as the corresponding labor demand at the particular wage rate is lower than the long-run labor supply which is independent of the wage rate. Figure-1 in the attached document below illustrates the unemployment created in the labor market due to real wage rigidity. In the figure, DL and SL represent the demand and supply of labor in the market in the long-run. L1 represent the equilibrium level of employment in the market at which the labor demand and supply are both equal or identical at the equilibrium real wage rate of w1 in the long-run. Now, as the real wage rises to w2, the labor supply exceeds the labor demand as that particular real wage rate the firms, companies, or the business organizations are not willing to hire the amount of labor as much as supplied in the market creating excess labor in the market and an unemployment level which can be calculated by taking the difference between L1 and L2. Therefore, in this case, the higher wage rate in the market is unable to ensure the equilibrium employment where the long-run labor supply and demand are equal. Now, with respect to the economic downturn in Venezuela in early 2015, lower oil price and a decline in overall oil production level due to lower maintenance and capital or business investment level in the country would understandably lead to lower labor demand by the domestic oil companies and manufacturers. Hence, everything else held constant, at the existing wage rate in the labor market, the oil companies would not be willing to hire the number of workers or laborers as much as they are willing to work or avail themselves in the job or labor market. Thus, the wage rate has to essentially drop in order for the labor demand to match or equivalently correspond to the labor supply level in the market. This labor market predicament or imbalance would create wait unemployment or job rationing attributable to wage rigidity in the Venezuelan economy during the concerned time period considering the whole impact of this structural unemployment.

In general, Frictional Unemployment can be beneficial for the economy and particularly for individual employees or workers as they can appropriately and effectively shift jobs or employment based on their professional and occupational skills, knowledge, credentials, and experience. From a practical point of view, often times the workers or employees might not be satisfied with their existing jobs or employment positions given the mismatch between their professional credibilities and skills and the specific job requirements and responsibilities and changing jobs or employment might generate higher job satisfaction and yield higher professional productivity and efficiency. Hence, the overall labor productivity and efficiency can improve due to the impact or repercussions of frictional unemployment thereby contributing to economic growth and higher overall productivity.