German employers' attempts to prevent laying off workers failed to prevent the increase in unemployment.
"Given that many German firms are still trying to get by with short-time work instead of lay-offs, the marked rise in joblessness during March is a harbinger of even worse figures to come during the second half of 2009," said Timo Klein at IHS Global Insight.
Analysis
Unemployment is defined as the number of people of working age who are without work, available for work and actively seeking employment, it is measured using the rate of unemployment =(No unemployed/working population)*100. The working population are those who are registered as available for employment.
Permanent unemployment is a type of unemployment where the market is in disequilibrium; there are fewer jobs available than there are people who want them. One of the ways to deal with this is the classical view where there is excess aggregate supply (AS) which is, the number of people willing and able to work at any given wage rate. In order to protect workers trade unions set a minimum wage which causes aggregate demand (AD), which is the number of people the are will and able to employ workers at any given wage rate, to fall as less employers are prepared to employ QE workers at WM, and AS to rise as more workers are prepared to work for WM. The difference between QS and QD is excess supply which is also unemployment. The solution for this is the reduction of union power so that the minimum wage is removed and wages can fall to the equilibrium position WE. However this unemployment policy is unlikely to be adopted as this would have a great affect on the poorer workers, reducing income and thus increasing income inequality causing the living standards of those poorer workers and Germany to fall. Falling wages is unacceptable because firms could exploit workers by paying very small wages in order to remain competitive.
The final type of unemployment is one where the labour market is in equilibrium, where the number of jobs available equals the working population, called temporary unemployment. Curve AS1, shows the number of people which are offering themselves for employment. Curve AS2 shows the potential number of people that could be employed. The difference between the two is called temporary unemployment which can be accounted for by:
- Poor information
- Occupational immobility
- Geographical immobility
- Lack of incentives to accept employment such as the level of benefits being larger than what they would receive if employed
- Lack of incentives to offer employment such as legislation where it is easy to hire a worker but is then harder to lay off when no longer needed
Unemployment policies that could be used to reduce this are:
- Provide a central employment agency for better job information
- Encourage greater geographic mobility by giving relocation allowances or give grants to companies in order for them to set up in an area with a high rate of unemployment
- Retrain workers
- Remove trade union imperfections such as abolishing the closed shop agreement.
- Reducing taxes on low paid jobs and reducing the real value of benefits to increase incentives to accept employment
- Reducing payroll tax, employment protection legislation and costs of redundancy to decrease disincentives of offering employment
In order to employ these, a reflationary fiscal policy could be adopted. This is when government expenditure increases and taxes decrease in order to better the economy. However this would means that Germany would most likely run a budget deficit, and so would have to raise capital by borrowing and then pay interest on that money.
The labour that is demanded will depend on the demand for the final product. The article says that the German economy is currently weak which means that the Gross National Product (GNP) is low which makes this the most likely reason for the high rate of unemployment in Germany.
GNP is the total income that is received by the population; usually in a year; and if people have less income they consume less goods and services meaning that AD decreases causing the AD for labour to also decrease, which is shown by the curve AD1. This is the Keynesian view on permanent unemployment which is also called is called cyclical unemployment. A method that Germany could use to decrease unemployment would be to use reflationary fiscal policy, which could cause increase GNP and thus shift AD to AD2. However this would cause a budget deficit which could lead to fiscal problems in the long run and even if taxes are reduced there is no guarantee that the extra income will be spent, it could be saved. Decreasing interest rates so that people will borrow more money to invest may also increase GNP but again there is no guarantee.
