Economists eye view on unemployment.

Unemployment Rate in India is reported by Ministry of Labour and Employment, India. Unemployment Rate in India decreased to 4.90 percent in 2013-14 from 5.20 percent in 2012. It averaged 7.32 percent from 1983 until 2013, reaching an all time high of 9.40 percent in 2009 and a record low of 4.90 percent in 2013-14.

Sector

Male

Female

(in percent)
Total

Rural

4.2

6.4

4.7

Urban

3.9

12.4

5.5

Rural + Urban

4.1

7.7

4.9

The Annual Employment & Unemployment Survey 2013-14, show that majority of the persons are employed in the primary sector. Under Agriculture, Forestry and Fishing sector, 46.9 per cent persons are estimated as employed. This is the first time the employment in primary sector has fallen less than 50%.

According to the reports by NSSO, illiterate population has the lowest unemployment rate. Because this segment of the society is ready to do low paying jobs. On the other hand youth is now more interested in skill based job as salary is better. This has been shown by an increase in the education loans in India. As per the data by Reserve Bank of India, in the past four years, outstanding education loan in the category of personal loan has almost doubled. Also there is a rise in the number of defaulters of education loan that clearly indicates the unemployment state in India especially for students who are looking for a job is bad.

So now coming to the title of this essay, there are 4 major theories on why unemployment is prevailing in an economy. The main assumption is Walrasian Labour Market conditions, there are jobs in the firms and there are unemployed workers, if known about these vacancies the unemployed workers would immediately bid down wages until supply and demand for labour are balanced.

In such a scenario if there is unemployment in the economy, there are four theories of the firm on why it is not hiring an unemployed worker, who offers to work at a marginally lower wage, also claiming to be identical to the firm’s current workers.

These responses are:

  1. If the firms accept such an offer made by the unemployed worker, then the market condition satisfied. All the observed unemployment is voluntary unemployment i.e, unemployment of people moving between jobs and those who are ready to work only at wages higher that the prevalent wage rate. This is the neoclassical model of unemployment.

  2. When the firm rejects the offer of the unemployed on the premise that the unemployed is not in fact identical to its own workers. In this view, the labour, market is not a market for a homogeneous commodity. Each job is unique and requires the unique skill that is embodied in the person. The unemployed workers are matched with existing vacancies not through the market, but through a complex process of search and match.

  3. Even though the firm would like to cut the wages and employ the additional worker, it cannot do this because it is bound by implicit and explicit agreements with its workers, arrived through collective bargaining, regarding the wages that have to be paid. In such contracting models wages are institutionally determined.

  4. The firm doesn’t want to reduce the wages, it believes that the benefits accruing to it from higher wages are more than the costs of maintaining the wages high. Higher wages impart benefits to the employing firm by improving the efficiency of labour. This is an efficiency-wage model.

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