Unemployment Theories and European Unemployment

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European unemployment

High rate of unemployment was not a characteristic of Europe until 1960s. The unemployment rate was very low until then and considered as a miracle (Blanchard, 2004). In 1970s the unemployment started to increase in Europe. It continued increasing in 1980s and came at a halt in 1990s. But the unemployment rate is not declining it became steady. The current unemployment rate of Europe is still very high. The unemployment rate of Europe increases from 4.8 percent to 8.3 percent between 1973-1975 recessions, and then it goes down to 5.8 percent till the end of 1979. It again rises in 1982. It became 9.7 percent. Then it declines to 7.0 percent (Fischer, 1986).

What were the causes of this unemployment problem in Europe? A number of adverse shocks faced by Europe in 1970s are responsible for this problem. In 1970s the production cost increased which was the period of post-war. The workers got perplexed, they increased their demands for wages and thus the unemployment rises. In 1980s, interest rates increased that causes lower capital accumulation and higher rate of unemployment. The thing that happened was the oil prices decreases from 1970s to 1980s.

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Best Describing Theory of Unemployment the unemployment in European countries

The theory that best describes unemployment in European countries is the Keynesian Theory. Three factors have been identified in literature, which are primarily responsible for this high unemployment rate: increase production cost, increase demand of wages from workers side and labor market conditions (Leijonhufvud, 2008). The high rate of unemployment started during the sixties and reached at its peak, during the seventies and eighties. According to Keynesian Theory, the only viable solution for controlling the unemployment is to increase the production of the commodity and this would allow the employer to recruit more labors. The sixties and seventies in Europe witnessed a massive boom in production and therefore, increase in production also compelled the labor market to demand for higher wages (De Vroey, 2008). As workers demanded for higher wages, which they were not granted and therefore, they left their work. During the eighties, the labor market was primarily responsible for increasing the unemployment rate. From Keynesian perspective, intervention and involvement of government is necessary to control and monitor the market and to control prices and wages. During the eighties, the labor market did not want excessive government intervention and this further contributed towards higher unemployment rate (Leijonhufvud, 2008). Based on the analysis, it is evident that Keynesian Theory had best described the higher rate of unemployment in Europe. Workers in Europe primarily became dissatisfied with their wages and involvement of government and therefore, left their jobs. This primarily increased unemployment within the European region as the government took measures to control and regulate the market.

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Conclusion

Both the classical theory and Keynesian theory explains the European Unemployment. The unused labor and capacity of capital indicates Keynesian unemployment while the lack of physical instruments and equipment to be utilized by new coming hiring’s and excessive labor wages indicates classical theory. So, we can conclude that both the theories explain the European Unemployment.

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References

Blanchard, O. 2006. European Unemployment: The evolution of facts and ideas. Economic Policy, 21 (45), pp. 5-59.

Blanchard, O. 2004. Explaining European Unemployment. Forthcoming in NBER Reporter.

Blanchard, O. J. and Summers, L. H. 1986. Hysteresis and the European unemployment problem. It Press, pp. 15-90.

Dreze, J. H. 1992. [BOOK REVIEW] UNDEREMPLOYMENT EQUILIBRIA, ESSAYS IN THEORY, ECONOMETRICS, AND POLICY. Manchester School of Economic and Social Studies.

Marx, K. and Engels, F. 1967. The Communist Manifesto (1848). Trans. AJP Taylor. London: Penguin.

Smith, H. 1994. JOHN MAYNARD KEYNES: VOL. II: THE ECONOMIST AS SAVIOR 1920-1937. Magill Book Reviews.

Stockhammer, E. 2004. The Rise of European Unemployment: A Synopsis.

Stolper, W. 1948. HARRIS, SEYMOUR E. (Ed.). The New Economics: Keynes' Influence on Theory and Public Policy., New York

Alfred A. Knopf, 1947. The ANNALS of the American Academy of Political and Social Science, 257 (1).

Leijonhufvud, Axel, 2008. Keynes and the Crisis", in: , CEPR Policy Insight, volume 23

De Vroey, Michel, 2008. Keynes, Marshall and The General Theory, in: , Keynes Seminar, Cambridge, (19 November).