Eurozone Unemployment at Record High as Inflation Drops - Article Example

Name Tutor Course Date Analysis of the article “Eurozone unemployment at record high as inflation drops” Introduction By March 2013, the rate of unemployment in Eurozone had hit a record high of 12.1%, from the figure recorded in February of 12%. Approximately 19.2 million people are presently unemployed in the 17 countries. A total of 3.6 million youth in the Eurozone are also presently out of work. 59.1% of the youth in Greece and 55.9% in Spain were not employed by the end of January this year. The good news is that inflation has dropped to the lowest in three years (BBC News 1). With reference to various economic concepts and theories, this discussion aims to provide an analysis of unemployment and inflation in the Eurozone. The discussion will focus on unemployment and inflation in the Eurozone in reference to the article titled “Eurozone unemployment at record high as inflation drops” Posted on 30 April 2013. Unemployment According to Susanto and Bundick, The rate of unemployment broadly refers to the percentage of the labor force that is out of work at a given time in an economy (5). Labor force in this context refers to the aggregate number of employed and unemployed workers in an economy. People who are willing to work but have been unable to secure employment in the previous four weeks are referred to as discouraged workers. There are three categories of unemployment; frictional unemployment, structural unemployment and cyclical unemployment (Calfors and Drfill 78. Frictional unemployment Frictional unemployment refers to unemployment that is short-term and arises from processes of matching jobs with workers. A majority of the people in this category are college or university graduates and school leavers searching for their first job. This category also includes those who have been absent and are getting back to their jobs, as well as people who lost or quit jobs and are searching for new ones (Bloom 31). Structural Unemployment Structural unemployment refers to unemployment that arises by persistent failure to correctly match the skills and qualities of workers with job requirements. Change in technology and consumer preferences are common causes of workforce redundancy. This type of unemployment can be minimized through retraining. A combination of structural unemployment and frictional unemployment results in what is known as the natural rate of unemployment. In the event that the level of unemployment does not lead to an increase in the inflation rate, this is referred to as the non-accelerating inflation rate of unemployment (NAIRU). Unemployment Rate Curve In the article titled “Eurozone unemployment at record high as inflation drops”, it is reported that while the rate of unemployment increased significantly, the rate of inflation dropped to a three-year low. Most of those unemployed in the Eurozone are either students who have graduated and looking for their first jobs, or those who are not able to adequately compete for available opportunities because of lack of appropriate training. Eurozone is therefore experiencing what is referred to in economics discourse as natural unemployment. The rise in natural unemployment in Eurozone is to a large extent attributed to institutions of the labor market that are overly restrictive. According to Dong, labor markets are known to have job security legislations that are very restrictive, numerous labor union agreements, and unemployment benefits that economists deem to be overly generous (53). The prevailing situation in Europe of a decrease in the inflation rate and increase in the rate of unemployment, and in consideration of the commitment of the European Central Bank in stabilizing prices, questions arise on how this kind of inflation impacts on the trade-off of the Phillips curve. As it has been documented in numerous economics studies, high rates of inflation result in more variations in relative price. Data from Eurostat indicates that consumer prices increased by 1.2% in April, which is much slower than the 1.7% rise recorded in March. The slowdown is attributed to a decrease in energy prices; implying inflation is at its lowest since February 2010 (BBC News 2). Inflation Inflation refers to a continued rise in the prices of goods and services in an economy. Inflation is measured using the consumer prices index, which represents the variation in the average prices of goods and services that are consumed in an economy. The fall in the inflation rate in euro zone is however not big enough to provide an explanation for the drastic rise in unemployment by a simplistic Phillips curve trade-off. As observed in the past 10-15 years, the rate of inflation has remained low, while the rate of unemployment continued to rise. Graph showing standard deviation of output against standard deviation of inflation What this trend suggests is that that the persistent high rates of unemployment in Eurozone are attributed to low wage inflation levels. What this implies is that regardless of the diversity in employment experiences of the Euro area countries, there should be other factors at play in shifting the trade-off between wage inflation and unemployment. Leduc and Zheng point out that several explanations have been advanced by proponents of the Phillips curve relation (8). In economics discourse, cyclical unemployment that is some times referred to as ‘demand deficient’ unemployment refers to unemployment that is attributed to business cycle recession Euro zone’s Phillips curve relation has changed, and the explanation that is best suited for this trend is that NAIRU, or equilibrium unemployment has increased significantly in the recent past, and continues to vary over time. Unemployment in the Euorozone countries is persistently evolving, and this can be best attributed to the impact off structural aspects as opposed to sheer business cycle movements. It has been observed in the discourse of economics that that the rise in Europe’s NAIRU is largely attributed to labor market institutions that are overly restrictive (Siebert, 1997). But this institutional argument is limited in the sense that labor market institutions already existed even when levels of unemployment were considerably lower, and a majority of these institutional rigidities have been on the decline since the 1980s (Blanchard and Wolfers, 2000). Thus, according to Blanchard and Wolfers (2000), apart from labor institutions, macroeconomic shocks that are largely unfavorable are the probable causes to the ever rising levels of European unemployment. Macro-Economic Shocks In the article titled “Eurozone unemployment at record high as inflation drops”, economists have observed that the European Central Bank (ECB) is likely to announce a reduction in interest rates. Real interest rates are largely considered in economics discourse as measurements of costs of capital. It is expected that rising real interest rates should result in slower economic activity since there is an apparent increase in capital costs. Subsequently, there is a decreasing investment which ultimately decreases employment. Economic analysts are of the view that the high interest rates imposed by ECB may have played a significant in the evolving wage inflation and the subsequent unemployment in Europe. Lagos et al argues that labor demand is a variable that is calculated as a percentage of the share of labor in the aggregate business sector income (67). The share of labor varies expanding on shifting technological innovations or a decline in wages relative to capital costs. The expectation is that a decline in the demand for labor will result in an increase in unemployment levels if the decreased demand for labor is not neutralized by a fall in real wages. The trade-off of unemployment inflation is to a large extend determined by the influence that labor market institutions have on bargaining processes between workers and employees. Labor market institutions have been observed to limit the employment prospects of workers by increasing the bargaining power of workers and consequently resulting in higher remuneration demands. Apparently, the unemployment situation in Europe could be attributed to the reluctance of employees to bring more people on board, as laying of workers in the Eurozone countries is not just a cumbersome exercise, but a very costly one as well (Blanchard and Wolfers 6). Wages in the euro zone countries are to a large extent determined by collective bargaining. The high density of unions in these countries has resulted in more union power, which in turn exerts an upward pressure on average wages. This coordinated and centralized bargaining prowess is considered to impact negatively on employment prospects (Calmfors and Drifill, 1988). The unemployment tradeoff is also considered to be largely determined by government policies. The replacement ratio refers to the ratio of unemployment’s benefit to the median wage. European economies are observed to be more generous in wages, thereby significantly influencing employment prospects. The high unemployment benefits in Europe have resulted in decreased job search activity, thereby prolonging durations of unemployment (Siebert 6). Concussion High unemployment rates in Europe are to a large extend associated with low wage inflation, implying that the the Phillips curve pattern is changing with time especially in regard to the countries the Eurozone. These change in the Phillips curve are to a large extend associated with the increase in the European NAIRU. Additionally, it has been widely observed in economics discourse that rigidities in the labor market are the root cause of the upward movement in the natural rate of unemployment. Works Cited BBC News. Eurozone unemployment at record high as inflation drops. Retrieved on May 19, 2013 from Baker, Scott. R., Nicholas Bloom, and Steven J. Davis. “Measuring Economic Policy Uncertainty.” Stanford University working paper, 2012. Susanto, Basu and Bundick Brent. Uncertainty Shocks in a Model of Effective Demand.” Boston College working paper. 2011. Blanchard, O. J., and Wolfers, J. The Role of Shocks and Institutions in the Rise of European Unemployment: The Aggregate Evidence,” The Economic Jornal, (2000). 11, 1-13 Bloom, Nicholas. “The Impact of Uncertainty Shocks.” Econometrica, 2009. 77(3), pp. 623–685. Dong, Mei. Inflation and Variety, International Economic Review, forthcoming. (2010). Lagos, Ricardo and Guillaume Rochetateau. Inflation, Output, and Welfare”, International economic Review, 2005, 46, (2) pp. 495-522 Leduc, Sylvain, and Zheng Liu. Uncertainty Shocks Are Aggregate Demand Shocks. FRB San Francisco Working Paper 2012-10. 2012. Siebert. H. Labor Market Rigidities: At the Root of Unemployment in Europe,” Journal of Economic Perspectives, 11(3), 37-54. Calfors, L., and Drfill J, J. Bargaining Structure, Corporatism and Macroeconomic Performance. Economic Policy, 6, 14-16 Read More