What is the Ideal Unemployment Rate ?

Unemployment is considered to be one of the biggest social evils that is affecting our lives today. Its economic impact is not as important as its social impact. Most people in society today depend upon jobs to earn their living. Therefore, any scenario which negatively affects the jobs of these millions of people will affect the fabric of the entire society as a whole.

Hence, we are sure about one thing i.e. unemployment is a bad thing and that it must be eradicated. However, what constitutes the word eradicated is not clearly understood. Should unemployment be managed at a given level or should it be completely removed from society? The answers to these questions are complex and therefore we will deal with them in the rest of this article.

The Prevalent Viewpoint

The prevalent viewpoint in the world is that unemployment cannot and should not be completely eradicated. This notion stems from the fact that zero unemployment is an impractical goal. This goal has been followed for many decades by communist countries and the result was utter chaos and economic mayhem. The more conservative point of view suggests that unemployment is like a necessary byproduct of the modern economic system. However, it must be managed within its current levels. Failure to manage this unemployment creates problems. However, eradicating it completely is not an option at all.

This brings us to another question as to what is that optimum level of unemployment that a government must try to obtain. The answer to this isn’t straightforward either. There is no hard and fast rule that can be applied to all economies at all points of time. There are a multitude of variables that play a part in the unemployment rate. Hence, the only logical conclusion is to compare the performance of an economy to that of its peers. Most developed countries will be facing similar economic conditions and hence their unemployment rates can be compared with one another and the same logic can be applied to developing as well as third world countries.

Hence, according to modern theory, the ideal unemployment rate is not a static goal. Rather it is a dynamic goal that changes in accordance with the current situation.

Why Manage Unemployment ?

Economic theory has seen many hardliners who were obsessed with the idea of zero unemployment. Their logic was that economies exist to provide human needs and serve humans. The biggest way in which they serve humans is by providing employment. Hence, zero unemployment must be the foremost (if not the only) objective driving economic policy creation. Such ideas found patronage in communist societies worldwide. However, if one sees beyond the basic argument, the flaws are readily apparent. The most obvious ones have been listed below:

  • Types of Unemployment: The modern economic system does not define unemployment as a single term. This means that not all types of unemployment belong to one and the same category. Rather economists have created multiple categories to segregate unemployment caused by different root causes. We will learn about them in the next few articles. However, for the moment, it needs to be understood that some forms of unemployment are indeed voluntary or beneficial. This is the unemployment caused when people need to re-skill themselves to meet the needs of a changing economic environment. Also, some people may want to spend more time being unemployed till they find a job that matches their skill sets.

    The government cannot eradicate these types of unemployment until and unless it encroaches on the rights of the employers and the employees to make their own decisions. Since we live in a free market, this is not possible. Hence, the word “unemployment” as it is currently defined will always be a part and parcel of life.

  • 100% Percent Employment and Growth! Secondly our economic system is built on the notion of perpetual economic growth. Human resources are one of the biggest factors contributing to growth. If the human resources are 100% employed, where does it leave room for growth? How can an economy grow when one of the inputs required for growth has been exhausted?

Conclusion

Hence, it would be safe to say that the modern approach of comparing the unemployment rates with peers is relatively better than pursuing the utopian goal of 100% employment. There are some drawbacks to the peer evaluation approach as well. However, they can be managed relatively painlessly and this method is definitely the better of the two evils.


❮   Previous  Article Next  Article   ❯

Authorship/Referencing - About the Author(s)

MSG team comprises experienced faculty and professionals who develop the content for the portal. We collectively refer to our team as - “MSG Experts”. To Know more, click on About Us. The use of this material is free for learning and education purpose. Please reference authorship of content used, including link(s) to ManagementStudyGuide.com and the content page url.