Unemployment

Unemployment can be have many different causes they say. It can be cyclical, structural, classical, marxian etc. Cyclical is supposed to be because of lack of demand, structural because people don't have the skills for the advertised jobs and classical because the wages are too high.

I think this is a over complication of the issue. And I think it exists because there are so many people with political agendas with regards to unemployment. For any other product in the economy one would not make up such convoluted explanations.

If one compares unemployment to not being able to sell enough units of a certain good then this can be explained in the following way: number of units sold and price is determined by the intersection of the demand and supply graphs. Both demand and supply determine number of units sold not just one factor. Which I think is the problem with the unemployment explanations which try to narrow it down to just one factor.

If too few units are sold one could say that that is because the demand is too low. That would correspond to cyclical unemployment. But it is equally valid to say that too few units are sold because the price is too high. Which would correspond to classical unemployment. A third person might argue that too few units are sold because you are selling the wrong product. You should be selling something else with which there is more demand for.

In all these examples everybody is actually right. It all depends on perspective. Since every explanation is equally good, different groups will chose the one that best fit their agenda. The buyers (employers) will say it is because the product cost too much. The sellers (workers) will say it is because there is not enough demand. While a third party observing the whole thing might suggest that it is because the seller is selling the wrong product.

Since every explanation has equal merit, one should not be caught up in who or what is to be blamed. Instead what is of interest is what action will be most effective in reducing unemployment.

If we compare to good sold again the question is how to we increase the number of units sold, while at the same time making a decent profit. If profit was of no concern we could simply give away our products (work for free).

First option is reducing the price. This can be done in two ways either by reducing our own profit or by doing cost reductions which will give the same profit but lower price. In labor market terms this corresponds to either accepting a lower wage or work longer hours or more efficient. If this is effective or not depends on price elasticity. If consumers wont buy more goods unless the price is dropped considerably this is a bad strategy.

Second option would be to sell another product. If we can find another product that more people are willing to pay for and are willing to pay a good deal for than this is a good option. Of course it is limited to what we are capable of making. In labor market terms this means getting different skills.

Both first and second option is about things you can do yourself. Increasing demand for a product is typically now within ones power. Either other people have to develop different tastes, or get more money from increased wages or tax cuts. Whether government should do this or not depends on how people are likely to spend their money.

If money from tax cuts are saved or used for other things then sales will not increase and this was a bad measure.