Considering the ILO reporting 6.00% unemployment rate for the world in 2012 (ILO Report 2013), it is obvious that unemployment is a commonly observed phenomenon. Chart 1 displays the devel-opment of the unemployment rate for 20 OECD countries2 from 1955 until 2011. The average of all these countries in 2011 was 7.67%; of the EU 15 alone was 8.41%.
In order to explain why unemployment occurs, the first part of this essay will deal with the different general theories of unemployment. Following this, the specific issue of European unemployment will be treated in the second part. This essay will conclude then with the author´s estimation which theory explains European unemployment best.
Table of Contents
1. Introduction
2. Unemployment theories
3. Unemployment in Europe
4. Conclusion
Objectives & Core Topics
This essay explores the underlying economic theories of unemployment and applies them to the specific context of the European labor market, aiming to determine which theoretical framework provides the most compelling explanation for current European unemployment trends.
- Theoretical classification of unemployment (equilibrium vs. disequilibrium)
- Impact of labor market institutions and unionization
- The role of hysteresis in persistent high unemployment
- Comparative analysis of European vs. US unemployment dynamics
Excerpt from the Book
Unemployment theories
Classifications of theories as New Classical or Keynesian will be avoided as the understanding of these terms can be easily biased. Basically it is sensible to distinguish between two main situations for unemployment; unemployment in an economy which produces below its possible output level and in an economy which produces at possible output level (Chrystal & Lipsey 2007). Unemployment in the first situation can be called disequilibrium unemployment; in the latter equilibrium unemployment (Garratt and Sloman 2010). This distinction relates to the model of the natural rate of unemployment, which implicates that, the supply of and the demand for labour meets at the equilibrium; thus, balance out (frequently called Not accelerating-inflation rate of unemployment (NAIRU)) (Griffiths and Wall 2007).
Accepting the Residual unemployment (people, who basically cannot be employed due to various reasons), the equilibrium unemployment can be subdivided into Frictional, Seasonal and Structural unemployment (Grant and Stanlake 2000). Frictional unemployment arises when employees change from one employment to another. In this sense it is inevitable, however the duration of unemployment is among others conditioned by the quality of information about new jobs and the determination of people to search for new jobs as well as the institutional structure (Garratt and Sloman 2010; Grant and Stanlake 2000; Griffiths and Wall 2007). Seasonal unemployment occurs when the demand for labour fluctuates within a year (Garratt and Sloman 2010; Grant and Stanlake 2000). Structural unemployment emerges where the pattern of demand alters due to radical changes of the industry´s structure. If this shift is spatial it is called Regional unemployment, whereas the subspecies Technological unemployment describes the situation when new manufacturing processes decrease the intensity of labour. Thus, the structurally unemployed possess skills that do not match the altered requirements of the industry (Garratt and Sloman 2010; Grant and Stanlake 2000; Griffiths and Wall 2007).
Summary of Chapters
Introduction: Provides an overview of global unemployment trends, introduces the distinction between general unemployment theories and the European context, and outlines the essay's objectives.
Unemployment theories: Defines the core concepts of equilibrium and disequilibrium unemployment and categorizes the different types of unemployment, such as frictional, structural, and real-wage unemployment.
Unemployment in Europe: Analyzes the specific factors driving European unemployment, focusing on unionization, wage determination structures, unemployment benefits, and the impact of hysteresis.
Conclusion: Synthesizes the findings, arguing that while various theories hold true, demand-deficient unemployment and insider-outsider dynamics, exacerbated by hysteresis, are the primary challenges for Europe.
Keywords
Unemployment, Equilibrium, Disequilibrium, NAIRU, Frictional Unemployment, Structural Unemployment, Hysteresis, Insider-Outsider Theory, Unionization, Wage Determination, Labor Market, OECD, Economic Theory, Real Wage, Efficiency Wages.
Frequently Asked Questions
What is the primary focus of this paper?
This paper examines the fundamental economic causes of unemployment and evaluates which specific theories best explain the persistent unemployment trends observed in Europe.
What are the central themes discussed in the work?
The core themes include the distinction between equilibrium and disequilibrium unemployment, the effects of labor market institutions like unions, and the long-term impact of hysteresis.
What is the main objective of the research?
The objective is to identify the most significant drivers of European unemployment by applying established economic models and determining which theory offers the most robust explanation for the data.
Which scientific methodology is employed?
The essay employs a comparative theoretical analysis supported by historical data from OECD countries and existing academic literature to assess current economic models of unemployment.
What specific topics are covered in the main body?
The main body covers the classification of unemployment types, the role of real wages and efficiency wages, the impact of unionization levels, and the consequences of unemployment benefit structures.
Which keywords characterize this study?
The study is characterized by terms such as hysteresis, structural unemployment, labor market rigidities, unionization, and equilibrium unemployment.
How does the author define the 'insider-outsider' theory in the context of Europe?
The author describes insiders as employed individuals who use their bargaining power, often through unions, to maintain higher wages, thereby limiting the opportunities for outsiders (the unemployed) to enter the labor market.
What role does hysteresis play in European unemployment?
Hysteresis is identified as a critical threat because it suggests that high current unemployment levels shift the natural rate of unemployment upwards, making it increasingly difficult for the unemployed to return to the workforce over the long term.
Why is Spain mentioned as a prominent example in the analysis?
Spain is highlighted as a primary example to illustrate how the level and duration of unemployment benefits significantly influence the job search behavior of workers, thereby affecting the overall unemployment rate.
- Quote paper
- Ralph Strubbe (Author), 2013, Unemployment Theories and Unemployment in Europe, Munich, GRIN Verlag, https://www.grin.com/document/215308
