Unemployment- The Future ?
Vaishnavi Pandalai
There was a twenty-year period before the 1970s’ in America where an unfavourable (negative) relationship between unemployment was formed. After the ’70s however, this changed. The relationship between inflation and unemployment, however, post the 70s’ have had a less clear relationship. This is often attributed to Milton Friedman’s theory of the Natural Rate of Unemployment. In many theories today, the relationship that the Natural rate of Unemployment defines stays at the core while drawing long term conclusions of how real factors like employment and output interact with inflation.
According to this theory, there is an equilibrium level of output and an accompanying rate of unemployment that is determined by supply factors like technology, institutions of the economy (Froyen 183). The naturally occurring rate was what was central to Friedman, that was his Natural Rate. he believed that equilibrating forces would cause levels of output and employment to return to the natural rate ( Froyen 183). Essentially stating that there is no intensity at which a monetary policy that can be enforced that can keep the output level permanent and the employment rates below the natural rate of unemployment.
The Phillips curve is a schedule that shows the relationship between unemployment and inflation rates (Froyen 185) It derives its name from A.W.H Phillips, an economist from New Zealand. It shows the negative relationship between unemployment and the rate of inflation. The relationship essentially states that lower rates of unemployment can be achieved, however, this comes at the cost of higher inflation rates. As a concept, Friedman agreed with this relationship but only in the short run, however.
In the long run, Friedman believed that the Natural rate of Unemployment comes into play. While enforcing monetary policy in the long run, the price expectation of the workers is equal to the price expectations of the firms. This occurs only at one point, that is at the natural rate of unemployment. What happens in the process is that labour suppliers ( workers/ employed ) anticipate a higher inflation rate than what exists, because of which the expected price level increases when the expected price level increases the Phillips curve shifts to the right. You could treat this as a separate short-run Phillips curve that has a new inflation rate that is equal to the expected prices.
When this does happen, there are effects of the expansionary monetary policy and the economy has come back to the natural rate of unemployment, but, you end up with a higher inflation rate. Going back to Friedman, he essentially stated that don’t intervene, because even if you do, the effects will only be there in the short run, in the long run, the economy is going to come back to the natural rate of unemployment but because of the intervention, it will come back at higher rates of inflation. The long-run is what matters, specifically with the case of employment.
On the contrary, looking at Marx’s economics, economic growth is determined by the proportion of surplus value which is converted to capital ( Thomas 145). The way labour grows or does not grow depends on this particular aspect, it depends on how machinery grows. The improvement in Capital investment does not directly relate to how labour demand increases. Economic growth does not alway imply that there will be an increase in the demand for labour.
According to Marx, there is a very specific and integral part that the labourer contributes to the process of making a commodity.
“They reproduce their subsistence as well as generate value for capitalists. That is the real wages of the worker enables the reproduction of their labour power.” (Thomas 141) [1]
While this is what a labourer does for the capitalist, in Marx’s economics, workers save when business is good in order to survive when business is not good (Thomas 141).
Labourers here are in anticipation of bad time, basically stating that the wages that a worker earns i.e the real wage is the primary independent variable. However, this comes right in the way of how labour contracts are often signed which are on the basis of money wages and not real wages. ‘The real wages of the workers enable the reproduction of their labour power’ (Capital I : 299). Essentially, stating that the real outcomes employment and output are dependent on real wages.
The primary difference in the way Freidman viewed labour differently from Marx was in the portrayal of the power their positions had. In Friedmans’ theory, the labourer was considered to be a labour supplier, painting an image of how labour like any other product is demanded and there is someone who supplies it. The way Marx looks at it is that between the classes- which was he primarily classified society. He looked at it as the capitalist and the worker. The capitalist was one who was rewarded for the risk he took and the worker was required to carry out the production for the capitalist.
While monetary policy had a very direct and clearly visible difference in the way Friedman looked and viewed the economy, the Marxian view in the long run essentially states that the disequilibrium with respect to the commodity market, is caused by the leakages that are caused because of the primary motive of labourers to hoard ( save) when business is good. This eventually leads to a situation where the aggregate supply is not matched by the aggregate demand. The disequilibrium may be temporary but highly common. This causes the reason for which there is never a motive for full employment, which in turn makes the labourer’s position unstable (Thomas 155).
A fundamental aspect of the levels of unemployment within a country is the minimum wage that is applicable for a piece of work. While looking at minimum wages in India, the Ministry of Law and Justice has released The Code on Wages, 2019[5] . It was an act to amend and consolidate the existing laws relating to wages and bonuses and matters connected. In the Gazette, Chapter 2 deals with the fixing of the minimum wage and the payment of minimum wages. Clause 7(1) in the Gazette describes the procedures within which the government can fix or revise the minimum rate. Subsection 7 (1) (a) states:
“A basic rate of wages and an allowance at a rate to be adjusted, at such intervals and in such manner as the appropriate Government may direct, to accord as nearly as practicable with the variation in the cost of living index number applicable to such workers.”
The clause essentially states that what is primarily more important is the real wage of the worker and not the money wage. What remains important from the Gazette is that the cost of living index remains central, and this is essentially what is the cost of a particular basket of goods.
If you were to go back to Friedman’s relationship between unemployment and inflation, you can go back to look at inflation. When inflation is on the rise the cost of basic commodities, i.e the basket of commodities increases, if you were to juxtapose this on the 7th clause of The Code on Wages, 2019, the minimum wages would increase. Higher minimum wages could be seen as an incentive to work.
Given below is the inflation data that the Union Budget of India 2020-2021 presented in a document called the Macroeconomic Framework Statement 2020-2021. It shows how the rates of inflation calculated keeping different indexes in mind have changed over the last two financial years.
The labour statistic in India was originally conducted by the National Sample Survey Office once every 5 years, this programme was discontinued and later taken up by the Labour Bureau which was also discontinued in the year 2015. While this is the case with the current state of the government record of the unemployment rate, there have been multiple studies that have been aimed to get this data.
The Periodic Labour Force Survey of the year 2017 was aimed at studying two key aspects, them being employment and unemployment. It studies employment in urban areas within a three month period, i.e. a short interval and secondly, labour force estimates for both the rural and urban areas[3](PLFS). It was launched by the NSSO. The data collected by the NSSO on different aspects of the labour force was through its quinquennial reports using paper schedules[3](PLFS, 2).
According to the PLFS data, the usual status unemployment rate of males is 5.8% and 3.8% for women in rural areas and 7.1% for Males and 10.8% for Females in Urban areas[3](PLFS, 7). The annual report in Chapter three explains how they have collected information for three categories: self employed workers, regular wages/ salaried persons and casual labour.
The unemployment estimates were found in the following manner a) the number of people who were not employed in the usual status and b) those that were not employed in the current weekly status. According to the report in both rural and urban areas the educated ( educational level of secondary schooling and above) were higher than the levels of those with lesser than secondary education. It was also seen that the unemployment rates were higher for females as compared to males in both rural and urban areas.
Source: Table 36 , Annual Report, Periodic Labour Force Survey 2017-2018, May 2019
Since the last available unemployment data is from the year 2017, it is difficult to be able to present a nuanced and well thought out policy for employment within the country. Since the largest affected group is educated youth from the findings of the PLFS, it is natural to draft policies that favour these groups while creating employment.
Source: Table 22, Annual Report, Periodic Labour Force Survey 2017-2018, May 2019.
The existing schemes of creating employment like the NREGA though is created in order to provide employment for anyone who is willing to do work for a given period of time, it does not incentives the educated and those who can afford to not work to work. It creates incentive only to that group within society that gets its income from daily wage labour or can't afford to be unemployed.
If you were to draw back to how Marx divided society, into two classes its stands true even in society today. Policies are created keeping in mind that there are two starkly different mindsets that people come with. This is reflective in the Economic Survey of 2019-2020. The preface of the survey states[6],
“Hon’ble Prime Minister highlighted in India’s 73rd Independence Day Speech on 15th August 2019 that only when wealth is created will wealth be distributed. Therefore, a feeling of suspicion and disrespect towards India’s wealth-creators is ill advised.”
While reading this part of the preface, it becomes clear that the capitalist who is willing to take the risk is to be treated with respect, as it is they who provide the wealth for many. Their models of business or investment creates multiple avenues of labour which intern gets people wages and eventually people start spending. Essentially - wealth creation.
The Survey pushes to urge people to spend. It goes to the extent of saying that according to earlier texts it was a noble deed to be spending. The Survey largely argues that through the processes of “Make in India” and “Assemble in India” when focused along with labour intensive exports create jobs on a large scale[6].
Chapter 5 of the Economic Survey speaks about the creation of jobs. While contrasting the lack of jobs among educated youth and the modes through which the economic survey presents to create jobs, if followed to the t, then would see a drastic reduction in that unemployment rate.
The Economic Survey states that the modes of creation of jobs should be bound within the framework of exports as there is great potential in that aspect. However, it is also important to keep in mind that there is a very clear goal while this survey was thought out- it was to make India a super power by the year 2025. To have exports at that rate within a short period of time.
While one way suggested by the survey is to specialize in while focusing on exports, this however does raise concerns of a repetition of what happened to countries like Malaysia during the Asian Crisis. If the market for the specialized creates a situation where the cost of the product is lower than the cost of making it then it's an invitation for trouble. There could also be a case of the market dying.
While this is true as the survey suggests, a thin blanket of multiple exporting commodities is also not useful for a country like India.
The Indian Governments seems to be one from the point of view of the Wealth creator, if it was to be paraphrased into the work of Marx, the point of view seems to be that of the Capitalists. While it is understood that a handful of Capitalists create employment for a lot of workers. The mentality of the government aligns with the capitalist while it fails to understand the majority of the population, the workers. The difficulty of getting jobs and staying employed is one that creates further fear for those who do have jobs and hence the tendency to hoard and save money within the working class increases.
The workers continue to work on an assumption that there are fewer good days as compared to bad days and hence reduces his consumption while he still has an inflow of money. This is where Marx’s understanding of the behaviour of the working class comes to be handy. He predicts how the labourer looks at employment slumps almost accurately.
However the process inevitably will lead to a cycle of the same events happening over and over again that the labourer loses his jobs and reaches the one part he feared. A bad day.
There is a certain nuance through which every economic crisis is to be dealt with, simply because no crisis repeats itself. There is always something that is different. The only case where everything could be controlled for and worked like a well oiled machine would be if the economy functioned the way the classical economists imagined it. There was perfect competition and perfect information. There was no power hierarchy and no politics. However, it does not function that way.
The classical system paints a picture of the Ceteris Paribus.
While that is true, one can not hope that non intervention or intervention by the government is the simple answer to the many policy changes that a government could make would be the answer to the looming question of what a government can do.
Through the course of learning Macroeconomics, while there have been multiple approaches that one could take to answering a fundamental question is not that there is one answer. The only common aspect across the board is there there is always a looming air of, there is more that can be done.
A solution may happen to appear, but that could give you more problems. Going back to the beginning, the natural rate of unemployment, while Friedman did say that the theory he postulated let unemployment come back to its initial natural rate of unemployment when monetary policy is applied, it comes at a cost.
It comes at the cost of higher inflation rates, hence, there is more that can be done. While the monetary policy gave one solution, it also gave a whole new problem. Dealing with unemployment within a macroeconomic framework is almost the same, parts of the solution may just create new problems to tackle.
References :
1.Froyen, Richard T. “Output, Inflation, and Unemployment: Alternate Views” , Macroeconomics Theories and Policies., 10th ed., 2014
2.Thomas, Alex M. ”Marx” , Consumption and Economic Growth In The Framework Of Classical Economics ,The University Of Sydney, 2015
3.Annual Report, Periodic Labour Force Survey June 2017- June 2018, May 2019. http://www.mospi.gov.in/sites/default/files/publication_reports/Annual%20Report%2C%20PLFS%202017-18_31052019.pdf Accesed 24th May 2020
4.Union Budget 2020, Macroeconomic Framework Statement
2020-2021,https://www.indiabudget.gov.in/doc/frbm1.pdf Accessed 24th May
5.Government of India, “The Code On Wages, 2019.” , Ministry of Law and Justice., New Delhi , 8th Aug. 2019
6.Economic Survey 2019-2020, Ministry of Finance, Department of economic affairs economic Division, Jan. 2020
