Question

Discuss the idea that unemployment is a "non-problem".

Jean-Baptiste Say, the classical economists, and some contemporary economists would argue that a discussion of unemployment is a "non-problem." Discuss the position that France or Germany really has no "unemployment problem." Hint: examine union rules, customs, and lifestyles, and compare union-management bargaining positions in France or Germany with those in Ireland or Spain.

Answer 1

The Classical Theory assumes the exsitence of full employment without inflation. Given wage-price flexibility, there are automatic forces in the economic system that tend to maintain full employment, and produce output at that level. Thus full employment is regraded as a normal situation and any deviation from this level is something abnormal which automatically tends towards full employment. This classical theory of output and employment is based on the following assumptions:

1 There is the exsitence of full employment without inflation

2 There is perfect competition in labour and product markets

3 There is a closed laissez faire capitalist economy without foreign trade

4 Labour is homogenous

5 Total output of the economy is divided between consumption and expenditures

6 The quality of money is given

7 Money wages and real wages are directly related and proportional

8 Wages and prices are flexible

9 Captial stock and techincal knowlege are given in the short run.

SAY'S LAW AND CLASSICAL THEORY

According to classical theory propounded by Ricardo and Adam Smith,level of income and employment are governed by fixed capital stock on the one hand and wage-goods fund on the other.In fact the wage goods surpluses are also called by them as capital and have been given the name of circulating capital or liquid capital in contrast to the fixed capital consisting of machines,plants, factory buildings, irrigation works etc.It may be noted in the beginning that the classical theory believes in full employment or near full employment prevailing in the economy.This believe of classical theory regarging the existence of full employment in the economy is based on Say's law put forward by a French Economist J.B Say.According to J.B Say's law ,"Supply creates its own demand".This implies that every increase in the production made possible by the increase in the productive capacity or the stock of fixed capital will be sold in the market and there will be no problem of lack of demand .

Thus, classical economist rule out the possibility of over production; There be no problem in selling the output produced thus deficiency in the demand being no problem the process of capital accumulation and expansion of productive capacity will continue till all people are employed and there is no reason why the productive capacity remains unutilised or under utilised.

According to this theory, the income which is not spend on consumer goods and thus saved will be automatically invested.Indeed , in the classical theory saving and investment are two factors of same phenomena that isan act of saving is an act of invest itself.Thus the leakage caused by the saving in the income flow is made up by the investment expenditure.In this way a given productive capacity continue to be fully utilised and no problem of deficiency of demand arises.

Classical economist thought that if price mechanism in a capitalist economy is allowed to work freely without any interference by the government , then there is always a tendency to full employment in it.Of course,they admitted that in an advanced capitalist economy often certain circumstances arise due to which economy is not in a full employment equilibrium, but they firmly believed that there was always a tendency to full employment in the economy and certain economic forces automatically operate so as to move the economy towards full employment.Therefore according to the classical economist whenever there are lapses from full employment level, then these are removed automatically by the working of free price mechanism.

PRICE FLEXIBILITY AND EMPLOYMENT

In the classical model of employment changes in money wages and real wages are directly related and are proportional.When there is a cut in the money wage the real wage is also reduced to the some extend which reduces unemployment and ultimately brings full employment in the economy.This relationship is based on the assumption that prices are proportional to the quantity of money.It is argued that in a competitive economy a reaction in the money wage reduce the cost of production and price of products thereby rasing there demand.In order to meet the increased demand for the products more workers are employed to produce them.

As employment increase , total output also increases till full employment is reached.But economy is at the full employment level, total output becomes stable.Thus , given the stocks of capital,technological knowlegde and resources a precise relation exist between total output and the amount of employment.Total output is an increasing function of the number of workers.

Q=f(K,T,N)

Where Q = Total Output

K= Capital Stock

T= Technological knowledge

N= Number of workers.

This production function shows that in the shortest run the total output is an increasing function of the number of workers given the capital stock and technological knowledge.

The Global financial crisis led to deep recessions across many advanced economy.These are associated with falls in employment rates and sharp increases in budget deficits.France,Ireland and Spain experienced contraction from 2008 onwards , while Germany's economy started to contract a year later.In 2009,GDP percapita was 4-8 % below its peak level, with the smallest drop being in France(4.2%).The outlier was Ireland which experienced the most dramatic initial decline in GDP percapita.The declines in GDP percapita in part reflected labour market changes.Those countries that experienced larger declines in output so larger fall in employment rates and larger increase in the fraction of population unemployment.However there is not a perfect correlation between GDP declines and changes in employment and unemployment.Unit labour cost fell in Ireland and in Spain , although in these cases this decline in labour cost reflected a prolonged period of low nominal wage growth.In both these countries public sector wage moderation was a significant contributing factor.

With the exception of Germany all other countries experienced a significant structural weakening of their public finances in the wake of financial crisis- The scale of which had not been anticipated.

All the countries experienced a sharp decline GDP due to global financial crisis,while the magnitude vary from country to country.Ireland and Spain experienced largest weakening intheir public finances followed by France with the exception of Germany.Tax rises and expending cuts have naturally reduced household income.One common theme except Germany have implemented significant fiscal consolidation is that those in richest tenth of population, on average seen their income reduced by a larger percentage than those further down in income distribution.There is no common pattern of losses across different demographic groups.France and Ireland choose to protect spending on health and school from cuts while Spain choose to cut spending on both services deeply.