MACROECONOMIC STABILITY AND GROWTH MODEL

MACROECONOMICS 8

MACROECONOMICSTABILITY AND GROWTH MODEL

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Tableof Contents

Executive Summary 1

Introduction 2

Classical Economic Theory 2

Theory of Innovations 3

Effective Demand Theory 3

Real Business Cycle Theory 3

Globalization and Unemployment 4

Need For New Framework 4

Macroeconomic Stability and Growth Model 5

Scope of the Model 5

Economic Growth 6

Inclusive Growth 6

Employment and Decent Jobs 7

Implications of the Model 8

Limitation of the Model 8

Conclusion 8

Reference List 9

ExecutiveSummary

Theworld is currently in a crisis of unemployment. This is especiallywith respect to the young people especially those graduating fromcolleges. To curtail unemployment, governments must first find theroot cause of the problem. Poverty has been highlighted as the maincause poor livelihoods and social conflicts. Measures taken to reducepoverty will certainly reduce unemployment. This can only happen whenthere is equality in income distribution and in other sharedopportunities. This paper looks into the available literatureconcerning unemployment the unemployment theories. The paper furtherbrings out the limitations of these theories in addressing the issueof unemployment. As such, an alternative model, the macroeconomicstability and growth, is endorsed to address the problem. The scope,implications and limitations of the model are presented.

Introduction

Approximately900 million households in developing economies are living below thepoverty line drawn to be US$2 per capita. It is estimated that about200 million people are unemployed globally, 75 million being theyouth. These statistics are exclusive of the hundreds of millions whoare subjected to long working hours in unfriendly environments inthe informal sector where job securities are not guaranteed. This isamidst the fact that income security is defined by a decent andproductive employment. Even so, the problem of unemployment isworsening. The global economy is in a turbulence projected by anever-increasing inequality gap and sluggish growth. The ILO hasreported in 2015 that a further 12 million people will be unemployedby 2019, adding to the current 200 million (ILO 2012). Of these, the2008 global crisis contributed to the loss of 61 million jobs.

Theeconomies of japan and US are experiencing promising employmentsituations while others such as Europe are in an increasing downwardtrend. The sub-Saharan Africa and south Asia account for 75% of theglobal vulnerable employments. However, the situation is expected tobe curtailed to 38.9% from 50.2% since 2007 by 2019. The sub-SaharanAfrica has not witnessed significant improvements in employmentamidst improving economic growth performances in the region (Fields2012). The Caribbean, Latin America and Arab regions have also faceddeterioration.

Theserates and statistics make unemployment a disturbing economic issue.The available literature has tried to explain the reasons for so muchunemployment, each trying to be the dominant approach with respect tothe others. This paper looks into the available schools of thought ofunemployment. It further presents a neutral approach, with respect tothe theories, of finding a better way of fighting unemployment. Thefollowing questions will therefore be answered in the paper: what arethe existing theories of unemployment? Where have the existingtheories failed in curtailing unemployment? Is there a bindingsolution for global unemployment especially among the youth?

ClassicalEconomic Theory

Thistheory argues that demand and supply forces govern the labor market. Demand for labor is negatively proportionate to real wage such thatan increase in quantity demand for labor leads to lower wages.Correspondingly, an increase in wages results to decreased demand forlabor. Supply of labor is determined by the willingness of laborersto spend their time to work. Working hours are therefore directlyproportionate to real wage since workers will be willing to workextra hours for higher wages.

Thetheory therefore provides that to reduce unemployment, governmentsshould support initiatives that reduce the wages so that the quantitydemand for labor can rise. That applicability of this theory isquestionable in the contemporary world. Why should wages be reducedwhile cost of living is so high? Moreover, reduced wages result tolow productivity and motivation to work. This theory cannot thereforebe applied in the current global labor markets that have conformed tojob decency and productivity for better living standards. The theoryfurther argues that since demand and supply forces areself-regulators, there cannot exist a long-term unemploymentsituation (Yang 2014). It puts it that in the long run unemploymentwill clear itself to equilibrium where full employment is attained.It also dismisses voluntary and frictional unemployment. The theoryis more applicable to prices of commodities in the product market asopposed to the labor market.

Theoryof Innovations

Thetheory is not formulated for explicit unemployment reduction itpoints out how people can turn to entrepreneurship to get profits.According to the theory, an innovative person identifies a market gapand creates a new product. Subsequently, new production, newmarketing techniques and necessary innovation will result to creationof employment (Dachs &amp Peters 2014). The creation is assumed morethan the destruction resulting from innovation. In essence, theinnovation will prompt investment by an entrepreneur which resultsto a high demand for economic resources and their prices. Manyopportunistic entrepreneurs will enter the same market by imitatingthe new product and productions ways. There will also be a demand forraw materials and labor. There will be a correspondence in increasingwages while unemployment is checked.

Thetheory does not cater for the fact that in perfectly competitivemarkets, profits resulting from new markets are temporary. Whenimitators of new products enter a market, supply for the commodityincrease rapidly resulting to lowering the demand for the product.This leads to elimination of the initial high profits. In anotherperspective, the resulting rise in demand and price of economicresources leads to high production costs. The consequence is risingcosts and less revenue which eventually leads to liquidation. In thesame respect, the global population is rapidly growing. It is almostimpossible to come up with technology that creates more jobs that itdestroys. Innovation therefore leads to more unemployment as opposedto employments.

EffectiveDemand Theory

Accordingto the theory, total revenue is largely determined by aggregatedemand. This is in correspondence to a decreased cost of production.The decline in costs of production alongside increased revenues willresult to satisfactory profits. To reduce costs of production, thenappropriate technology must be employed it raises the level ofproduction while minimizing the costs (Beverige, 2014). While theprice of capital inputs are reduced, the government should lowertaxes while banks cut the rates of interest. Other costs such asinsurance and legal should also be reviewed downwards to ensurebusiness enterprises are profitable. When businesses becomeprofitable, they expand and employ more workers they also give themfair wages and working conditions.

RealBusiness Cycle Theory

Thetheory argues that input productivity growth is the underlying causeof employment and unemployment. A lesser inputs growth in comparisonto output growth results to an increase in total factor productivity.A stagnation or reduction in total factor productivity growth resultsto an inefficient economy. In such an economy, it is impossible toreallocated capita ad labor while the used combinations will yieldminimum profits. The negative growth of total factor productivity iscaused by used of inappropriate technology while the employees’skills are not being developed. Furthermore, there are no productinnovations while the prices of imports are rising. Thus, astagnation or decrease in total factor productivity has a negativeimplication on the other connected factors. For instance, in such aneconomy, investment spending and consumption expenditure will bebelow trend. Total working hours of workers and gross domesticproduct will be adversely affected. When all these variables aredeteriorating in that manner, there is no productivity not technologyimprovement hence an increase in unemployment. Factors resulting totechnology shocks at are industrial organizations, managementtechniques, Research and Development and scientific and engineeringdevelopments.

Globalizationand Unemployment

Globalizationhas recently been attributed to increased unemployment. In the US,shifted production and outsourcing to foreign economies has resultedto high levels of structural unemployment. This has contributed tounemployment in the economy. In the 1980s, the US dollar appreciatedagainst other currencies in the global market. This led to highprices of US exports to other countries in the global market leadingto a drop in the volumes of the exports. Subsequently, employment inthe exporting industries reduced (Hirst et.al 2015). Correspondingly,the appreciated dollar prompted imports from other countries into theeconomy of the US resulting to high rates of unemployment. In thecurrent global standings, the US dollar is depreciating in comparisonto other global currencies, making the country’s products cheaperin the global markets. As a result, exports from the US haveincreased while imports have decreased based on the high prices ofimported products. This has led to increased employment in the US.

Basedon the declining oil prices, globally, transportation costs are onthe decline. Taxes and wages were on an upward trend before the 2007crisis. As such, corporations were incited to outsource theirproduction to other countries. Corporations also relocated to othereconomies that offered better business environments in relation totaxes and wages. As the outsourcing and relocation happened, manypeople were rendered jobless, raising the level of unemployment.Additionally, in a move to increase profitability, firms have movedto reduce costs of production which include laying off workers. Thisled to increased unemployment.

NeedFor New Framework

Mosttheories that have tried to address the problem of unemployment havefailed due to the dynamic nature of the determining variables. Thereis therefore need to come up with a framework for employmentglobally. Adoption of an applicable framework will ensure that mostpeople are employed. This will include the currently desperatecollege leavers. This paper therefore proposes a macroeconomicstability and growth model as the cure for global unemployment.

MacroeconomicStability and Growth ModelScopeof the Model

Macroeconomicstability is a result of a balance in key economic variables. Thesevariables include but are not limited to savings and investments,expenditure, fiscal revenues, balance of payments and domestic demandand output (Borio 2013). Not all variables however need to exist in abalanced relationship. For instance, current account and fiscalsurpluses or deficits are allowed to be imbalanced for them to becompatible with the economy so long as they are funded sustainably.

Thereexists no limit as to how the macroeconomic variables must exist tocause stability or instability. Rather, the conditions are determinedby a continuum of specific variable combinations. It is relativelyeasy to pick out a country experiencing macroeconomic instabilitiesthere exists no defined point of macroeconomic stability. Rather,areas of improvement with respect to macroeconomic stability arebrought out. Economies suffering from macroeconomic stabilityexperience conditions of declining or stagnant GDP, double-digitrates of inflation, increasingly high levels of public debt and largecurrent account deficits as a result of short-term borrowing.Macroeconomic stability depends, alongside economic management, onkey market structures and sectors.

Theglobe is currently recovering from a financial crisis which left theliving standards of many households damaged. A damage in livingstandards particularly results to a macroeconomic instability.Financial markets, volatile exchange rates, galloping debt levels andinflation have had significant input in unemployment and increasingpoverty levels globally (Karabarbounis 2013). These are the evidentfactors that have contributed to the global macroeconomicinstability millennium development goals have therefore beenchallenging to pursue. This stability is therefore a necessity forinclusive and sustainable development.

Themacroeconomic policy aims at equitably and sustainably promotingsocial and economic wellbeing. In any economy, underemployment andunemployment are the underlying contributors to poverty. It istherefore vital to create economies that are closest to fullemployment at all times. This can only be done if the formal sectorin employment is in positive alignment to the dynamics of the laborforce.

Perpetualand unremitting economic growth is a prerequisite in attaining afully employed generation. It is also a tool for creation of fiscalspaces for addressing important social amenities like infrastructure,safe drinking water, sanitation and health services among others.Growth has been proven to be a vital aspect in reduction of globalpoverty (Ratha 2013). The growth is however required to be madestable, by macroeconomic stabilization. This stability is created bystabilizing the various intermediate variables that are determinantsof growth. The macroeconomic tools usable to attain theseintermediate objectives include strict regulation and supervision offinancial sectors, appropriate exchange rates and investment regimesand counter-cyclical monetary and fiscal policies.

EconomicGrowth

ActiveMacroeconomic policies are only viable when reinforced with otherintervention policies. The policies include active social and marketlabor policies alongside various combinations of investment, financeand trade policies.

Tobegin with, trades, innovations and investments are fundamentallycarried out by the private sector. The sector cannot therefore beleft out in the scope of a country’s strategic development. thesuccess of the sector is largely defined by access to businessservices and credits, community education and research and functionalinfrastructure (Leigh et.al 2013). Rural areas are currentlyexperiencing large gaps with respect to infrastructure. This posesthreats for the existing enterprises in the regions. It is thereforean international duty, through schemes such as aid for trade, toensure that inaccessible areas are developed by investing ininfrastructure. This will go a long way in curbing rural-urbanmigration while creating employment for many households.

Thescale of investment is also a determining factor. Large investmentspromote structural transformation which in turn is a key driver inthe dynamics of growth. Many countries do not have such large enoughlocal businesses to fund important investments. There is also adeficiency of large-scale projects that can boost technology andindustry. As such, there is need to creation of large or medium sizedenterprises in such regions in order to create satisfactory profitsfor local reinvestments.

Countriesthat have minimal unemployment have achieved coherency in social,environmental, industrial, trade, employment and macroeconomicpolicies. The resulting economic growth from these policies is afunction of their reinforcement for each other. The policy coherenceby all countries must therefore agree to the global policy coherence(Griggs et.al 2013).

Policycoherence is subject to state capabilities. In order to managelarge-scale social and economic shifts, a country should possessaccountability and efficiency. This is because only a state canimplement the policies as well as be accountable to its citizens forthe decisions made. A particular country must therefore deal with anygovernance deficits and institutional weaknesses as at alldevelopment levels (Griggs et.al 2013). For a state to be successful,it requires self-strengthened capacities which in turn promotecooperation and learning. A country must further collaborate withother non-governmental actors in order to foster long-term growth andinnovation.

InclusiveGrowth

MillenniumDevelopment Goals are not explicitly for poverty eradication. Theyalso play the role of upholding the foundations of human equity,equality and dignity (Switow 2013). It is therefore necessary thatbenefits be spread over the entire society as opposed todisproportionate and long-term accrual to few entities of the largersociety. Growth should therefore be inclusive. This means that theresulting growth should make it possible for people to shareopportunities that lead to accumulation of productive assets as wellas their utility in growth-oriented perspectives. Those who do notdirectly benefit from the growth should be catered for.

Itshould be noted however, that economic growth is not directlyproportionate to widely shared gains. The choices made with respectto policies are important factors. The globe has experienced abjectpoverty in rapidly growing economies while other poor economies havemanaged to eradicate this form of poverty and social exploitations(Corak 2013). Relatively even income distributions lead tosustainably strong economic performances while inequality on theother hand causes economic volatility.

Thereexist complex relations between growth and inequality. Factors thatcontribute to inclusive growth include gender dimensions employmentcreation and distribution of income. Gender inequality has resultedto empowerment of women as a socio-economic development tools. Thisis because various economic policies have different gender-basedimpacts most of them widen the inequality gap between men and women.

Governmentsshould increase public expenditure in the fields of education healthand training. These programmes have a direct impact in addressingpoverty and exclusion (Belcher 2015). Investment in social servicesraises aggregate demand which in turn redirects private investmentbenefits to the society. Vulnerable groups such as the chronicallyill, people living with disabilities, older persons, children andsingle parents can be supported by use of cash transfers by thegovernments and other institutions.

Employmentand Decent Jobs

Decentjobs are created as a result of inclusive growth. Such jobs, whilebeing fully productive, create pathways for strengtheningcommunities, families and individuals as well as social and economicadvancements. Getting back to the pre-crisis status necessitates theglobe to create over 45 million jobs annually for a continuous periodof five years. There is therefore a resulting need to employ viabledevelopment strategies with a corresponding viable employmentcomponent. Strong labor market institutions will ensure that poorworkers increase their productivity in the long run. Focusing ondecent jobs curtails the implications of long periods of unemploymentin the short-term. It also leads to an equitable, inclusive andsustainable economic growth in the long term.

Thereis need for labor market and trade policies that are meaningful withrespect to employment and real wage conditions. Increased trade,depending on domestic firms and farmers’ abilities to increaselabor demands, contribute in global value chains and expand, presentsopportunities for creating jobs. (Bekaert et.al 2012) However,excessive trade openness can disrupt processes of adjustment.Liberalizing financial markets and trade, alongside inflexiblemacroeconomic policies has resulted to decreased real wages in theformal sector and increased unemployment in the informal sector.

Decentand productive jobs are crucial in fostering social development aswell as other areas in life. These jobs, when provided with humandignity, security, equity and freedom, give people a sense ofbelonging and promote social interactions. Jobs with income decencyhave been proved to reduce corruption and increases democraticgovernance. The employees also earn the capacity to invest in theirhealth and that of their children. Finally, having decent jobs leadsto social trust among the members of a society.

Implicationsof the Model

Economicgrowth is the foundational tool for poverty eradication. Studies haveshown there is a great link existing between national povertyindicators and national per capita income. This is with respect toincome and non-income approaches of measuring poverty. In a studyinvolving 80 countries in over 40 years, it was evident that asoverall economic growth is directly proportional to the rise inincome of the bottom 20% of the populations. This is with respect toper capita GDP. Growth has the same effect on income of the rich asit has on the income of the poor. Poverty reduction is therefore anecessary instrument for attaining a macroeconomic stability.

Limitationof the Model

Toapply the model in reducing poverty and unemployment, policy makersare required to develop a working framework. The framework would beused in assessing the distributional effect of the policy optionsbeing considered. The significance of the framework cannot be ignoredsince there exist complex relationships between poverty, unemploymentand macroeconomic policies (Sirimaneetham 2012). A quantitativeframework is therefore more useful in bringing out the relationshipswhich determine the outcomes assisting the particular country toassess the trade-offs.

Thequantitative framework requires several attributes. To begin with, itmust be in a position to identify existing critical trade-offs in theadopted policy for poverty and unemployment reduction (Sirimaneetham2012). For instance, it must answer the question of how poverty costsof higher spending relate to the poor. The framework should agree tothe theory as well as available basic data. Failure to have thisattribute will lead to inability of the framework to bring out theareas of conflict with regard to the macroeconomic policies employed.Most importantly, the adopted framework should be easy to use oncomputers. This is to enable usage of the framework by governmentofficials.

Conclusion

Sustainableand inclusive development is dependent on employing growth-orientedmacroeconomic policies. The macroeconomic policies must be coherentto redistributive measures and industrial policies in order to createdecent employment. There is also need to formulate other reinforcingframeworks for social protection as well as eradication of povertycausation factors and exclusion. These causation factors include lackof health and education provisions, poor housing and landdispossessions.

Achievementof macroeconomic stability and growth is a rather challengingundertaking. The defining characteristic of the model, which makes itunique and applicable compared to other unemployment theories is thatit takes into account many sub-issues that are usually difficult toloosen while being specific to particular countries. The sub-issuesare unique, challenging to measure and are neither syntheticallyquantifiable nor applicable across all economies. They are thereforenot explicit targets but factors for inclusion when conditioningdevelopment agendas.

Similarto macroeconomic stability, economic growth should be considered adriver of continued development and growth. The existing millenniumdevelopment goals require that an environment favorable to economicgrowth be created in every economy.

Creatingemployment exposes itself to explicit targeting. In this respect, allcountries on earth should conform to making employment a basic rightfor all their citizens who are in the labor force. There areindicator goals to achievement of full, decent and productiveemployment inclusively (Anker et.al 2013). They are-population toemployment ratio, proportion of dependency in households andproportion of persons living below the poverty line.

Inthe future, a new framework may be necessary which provides forcountry specific targets of employment. The targets would be expectedto be varying from one country to another in relation to the nationalcontext in ensuring relevance. For instance, a developing economycould adopt policies that will foster the growth of the agriculturalfaster than the available labor force while gradually shifting theeconomy from the agricultural to other sectors such as industry andtourism. Additional decent work indicators like creating employmenttargets will ensure the globe fully recovers from the currentunemployment crisis

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