Fundamentals of Business

Economic benefits of unemployment

Unemployment may have advantages as well as disadvantages for the overall economy. Notably, it may help avert runaway inflation, which negatively affects almost everyone in the affected economy and has serious long term economic costs. As in the Marxian theory of unemployment, special interests may also benefit: some employers may expect that employees with no fear of losing their jobs will not work as hard, or will demand increased wages and benefit. According to this theory, unemployment may promote general labour productivity and profitability by increasing employers monopsony like power (and profits).

Types of unemployment
Frictional - When moving from one job to another, the unemployment temporarily experienced when looking for a new job. Structural - Caused by a mismatch between the location of jobs and the location of job seekers. "Location" may be geographical, or in terms of skills. The mismatch comes because unemployed are unwilling or unable to change geography or skills.

Cyclical - (Demand deficient unemployment) unemployment
When there is not enough aggregate demand for the labour. Caused by a business cycle recession. Technological - Caused by the replacement of workers by machines or other advanced technology. Classical (real real wage) - When real wages for a job are set above the market clearing level, commonly government (as with the minimum wage) or unions. Marxian - When unemployment is needed to motivate workers to work hard and to keep wages down. Seasonal - When an occupation is not in demand at certain seasons. For example, construction workers in winter, ski instructors in summer.

Inflation
Sustained, rapid increase in the general price level, as measured by some broad index number of prices (such as Consumer Price Index) over months or years, and mirrored in the correspondingly decreasing purchasing power of the currency. It has its worst effect on the fixed wage earners, and is a disincentive to save. Any price increase alone (such as due to a crop failure), however, is not inflation. It is because such increases are self limiting in their effect, unless they cause an inflationary spiral in combination with factors such as wage increases, easier credit, or greater money supply. And because, economies in general show some increases in prices as they recover from a recession. There is no one single, universally accepted cause of inflation, and the modern economic theory describes three types of inflation:
(1) Cost push inflation is due to wage increases that cause businesses to raise prices to cover higher labour costs, which leads to demand for still higher wages (the wage price spiral),
(2) Demand pull inflation results from increasing consumer demand financed by easier availability of credit;
(3) Monetary inflation caused by the expansion in money supply (due to printing of more money by a government to cover its deficits).

Example
Extracts from Bloomberg
European Inflation Accelerates More Than Forecast as Oil Surges
By Ben Sills
June 30, 2008 (Bloomberg) - Inflation in Europe accelerated more than economists forecast in June, eroding consumers' spending power and adding to pressure on the European Central Bank to increase borrowing costs even as economic growth cools. The inflation rate in the euro area rose to 4 percent, the highest in more than 16 years, from 3.7 percent in May, the European Union statistics office in Luxembourg said in a statement today. Economists had forecast a 3.9 percent rate for June, according to the median of 38 estimates in a Bloomberg survey.
Deflation
Downturn in an economic cycle caused by circumstances, or brought about by government policies. Deflation is opposite of inflation and is characterized by
(1) increase in citizens purchasing power due to falling prices,
(2) decrease in wages, or slowdown in their increase, due to falling levels of employment,
(3) decrease in availability of credit due to higher interest rates and/or restricted money supply, and
(4) decrease in imports due to lack of demand. Governments cause deflation usually to improve their balanceof payments position, and/or to prevent overheating of the economy by an accelerating rate of inflation. Deflation is either by increasing taxes and/or interest rates, or by cutting down on government spending. Although effects of deflation are opposite to that of inflation, certain costs (such as minimum pay) generally do not fall. And, whereas inflation may or may not result in higher levels of output and employment, significant deflation always results in lower output and employment.