Business Economics - Unemployment

The unemployed as defined by Turley, Maloney and O'Toole (2006), are "those who are not working and are available for and actively seeking work". Unemployment rate is the number of people unemployed divided by the labour force. As reported in February 2012 by the CSO, in Ireland the unemployment rate is 14.3% and on the increase. From 1983-2010, unemployment rate was 10.55%, there was a historical high of 17.30% in December 1985 due to a deep recession.

The current unemployment rate is significantly high and there is an ever growing fear from both the governments and the public's side that it will continue to increase. It is an even bigger and more evident change from the record low recorded in 2001 which was at 3.70%. According to a 2011 article written by irishcentral.com, unemployment rate in Ireland trebles as 447,100 people are currently unemployed with 100 people emigrating per day.

After growing by 6% in 2007 and enjoying a prolonged boom since the mid 1990s, Ireland was the first EU economy to enter recession in 2008 (econ.economicshelp.org, 2009). This was fuelled by record levels of house price rises during the boom, then the Irish housing market turned with house prices falling rapidly causing a decline in consumer spending.

The work of John Maynard Keynes and his book The General Theory have made a tremendous contribution to our understanding of economics, so much that it became known as the Keynesian revolution. Keynes entered with his new theoretical ideas and policy prescriptions due to the great depression. Keynes countered the classical school of economics and approached things from a different angle. He proposed radical changes in the economic policy in terms of maintaining stability of the market. Keynes followed the mercantilists having adopted some of their ideas he advocated a more active role for the government. Keynes believed that the market was inherently unstable and that government policy could counteract instability in the market.

Keynes believed that the cause of unemployment lied within the deficiency in demand for goods. As opposed to the classical model, he argued that a cut in wage rate would reduce consumer expenditure and therefore a demand for goods. This is evident and relevant in today's economic crisis as some companies have been forced due to budget cuts to reduce employee's wages resulting in people spending less and therefore less supply of / demand for goods.

A recent example is of a famous lingerie store (La Senza) who has recently closed as their target market were those who took to luxurious and high quality lingerie garments, however due to lower consumer incomes the demand for these goods has rapidly declined and consumers have become cost conscious turning to purchasing lingerie in stores such as Pennys and Dunnes stores. Consequently La Senza were forced to lay off workers and close down stores as they were unable to maintain such a high level of costs at extremely low profits. This is one of many examples of business that has closed down or left the country including the likes of Sasha, Game, Adams, IBM and multiple small chain restaurants and cafes resulting in thousands of jobs losses and ever increasing unemployment.

The Fiscal Multiplier is the ratio of a change in National income to the change in government spending that causes it. The multiplier effect is a tool used by governments especially in time of economic recession to attempt to stimulate aggregate demand as an increase in aggregate demand can cause a change in aggregate output which then affects the aggregate income the initial spending generates.

This tool has not been utilised properly by the Irish government with regards to their anti-cyclical policies. With the country now in a recession, rather than stimulating the aggregate demand by lowering taxes and increasing expenditure on government investments; they have chosen to go the other way. During the 'Celtic Tiger', the Irish government reduced taxes, spent heavily on government projects, and increased social welfare (which encouraged some people to become dependent on government handouts thereby becoming reluctant to actively seek employment or training with a view to becoming employable).

Unemployment according to Keynes is direct result from a failure of demand as increased taxation would decrease disposable income which would mean that households will spend less and consumer expenditure then falls. When this is the cases, the government can increase the Gross Domestic Product (GDP) by deficit spending which is where the government spends above the level of taxes or tax below government expenditure. This deficit is financed by government reserves or by borrowing from private or foreign investors.

The multiplier effect is dependent on the Marginal propensity to consume (MPC) and Marginal propensity to import (MPM). Ireland being a small open economy has a very low Multiplier @ 1.1 due to a high MPM as households spend a sizeable percentage of their disposable income on imported goods and services. During the false Tiger economy (2002-2008) Ireland's aggregate demand was at 6%, there were increases in consumer spending (C), increases direct foreign investments (I), increases in government expenditure and investments (G, Ig), increases in imports (M) but exports (X) stalled.

This all contributed to the growth in economy even though this growth was mainly based on debts which was as a result of the Banks lending money and approving credit facilities to customers. Consumers became affluent and invested a lot in the property market; houses were seen as investments rather than consumption goods. Household income levels rose due to a rise in employment in the construction sector and services sector which then transcended into other sectors in the economy. Consumers believed that these changes in income level would continue therefore they borrowed more and spent more.

The value of the multiplier is also determined by the Marginal propensity to save (MPS), it refers to the increase in saving resulting from an increase in income. With Ireland becoming more affluent, there was more money supply in the banks due to deposits increasing which the banks further loaned out to other customers. The banks gave out more loans greater than their reserves and Consumers borrowed more than they could afford to pay back. They invested these loans into an over inflated housing market where Houses were overpriced and did not reflect their real value.

According to a 2007 article published by Moneyweek, the Irish construction industry is the primary area for employment "The entire Irish economy is dependent on property. It accounts for 15% of economic output, 17% of tax revenues,