Several countries regardless of their economic status have experienced various degrees of unemployment since the economic downturn in 2007. The U.S economy had an unemployment rate of 9.2% as at June 2011, Egypt with a 19% unemployment rate and the Saudi economy of 10%. This is very costly economically because it represents a loss in the GDP.
The classical theory analyzed by Pigou (1993) and Solow (1981) argues that the labor market consists of demand and supply of labor. The demand curve is a negative function of real wage in that if wages increase, the quantity demanded for labor will decline and the opposite is correct. Because one is employed does not mean that others are not unemployed. Cheaper labor to entrepreneurs is the most effective way to reduce unemployment. Technological advancements will cause a rise in the number of unemployed but these unemployed will also search for other jobs but this search is likely to reduce wages. Wage reduction is not a complete way to increase employment. Organizations look out for skilled workers who in turn look for better paying jobs which leaves ever...
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...en the degree of social guidance and the unemployment rate of today. For example, the Netherlands has returned to low unemployment while offering high social guidance.
In conclusion, an environment in which aggregate negotiation is central to wage determination, not only formal labor market institutions but also good labor groups are important to reducing the rates of unemployment.
Adil, H.M. (2011) ‘Important Theories of Unemployment and Public Policies’, Journal of Applied Business and Economics, [online], vol 12, no5, pp100-110, (accessed 16 March 2014).
John, S. and Dean G. (2010), ‘Essentials of Economics’, 5th edition, Harlow: Pearson Education.
Olivier, J.B. (2004), ‘Explaining European Unemployment’, The National Bureau of Economic Research, [online], Available from: http//www.nber.org/reporter/summer04/Blanchard.html, (accessed 16 March 2014).
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