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CHELSIE A.

BAGSIC Macroeconomics Theory and Practices


BSA III

Areas of Labor Problem

1. Unemployment and Underemployment


Unemployment refers to the economic situation in which an individual who is actively searching
for employment is unable to find work. Underemployment is a situation where there is a
mismatch between the employment opportunities and the skills and education level of the
employees. Both unemployment and underemployment result in adverse economic conditions
of a country and should be managed effectively in order to reduce and control its negative
effects. Thus, the government has a major role to play in policy formation in order to retain
skilled employees.
2. Inadequate Wages
Low wages produce effects which are harmful and undesirable, not only for the workers
themselves, but also for employers and society. In fact, most of the bad effects of
unemployment make themselves felt through curtailment of income; inadequate wages are
often the result of part-time and irregular employment.
It is possible, however, for a person to be steadily employed and still not receive enough to live
healthfully and decently or obtain what he believes to be his rightful share of the national
income. A large part of the working class fail to earn an adequate wage even in the best years.
This article deals with the effects of low wages, regardless of the factors which make them low.
3. Industrial and labor management conflict
For reasons of political issues that go back more than a hundred years, this concept is used
somewhat differently in different countries. In the U.S., the term "labor-management conflict"
generally refers to disputes between an employer and a group of employees, while a conflict
between an employer and a single employee acting alone is usually referred to as an
"employment" dispute. An organized labor union is usually involved in labor- management
conflicts, though these conflicts can be as basic as two employees approaching a supervisor with
a shared complaint about overtime or some other working condition.

Example:

A common type of labor-management conflict occurs when a contract governing a group of


employees is about to expire. Typically, the negotiations over the terms of a new contract will
be lengthy; although the vast majority of these are resolved without a strike, a significant
number run some risk of a strike as the parties compete to get the best deal possible for their
side. It is not uncommon for the parties to meet dozens of times, and still to need a mediator as
the deadline gets close.
4. Economic Insecurities
Economic insecurity describes the risk of economic loss faced by workers and households as
they encounter the unpredictable events of social life. Our review suggests a four-part
framework for studying the distribution and trends in these economic risks. First, a focus on
households rather than workers captures the microlevel risk pooling that can smooth income
flows and stabilize economic well-being. Second, insecurity is related to income volatility and
the risk of downward mobility into poverty. Third, adverse events such as unemployment, family
CHELSIE A. BAGSIC Macroeconomics Theory and Practices
BSA III

dissolution, or poor health commonly trigger income losses. Fourth, the effects of adverse
events are mitigated by insurance relationships provided by government programs, employer
benefits, and the informal support of families.

Theory of Wages

Classical Theory

Classical economics is a broad term that refers to the dominant economic paradigm of the 18th
and 19th centuries. Scottish Enlightenment thinker Adam Smith is commonly considered the
progenitor of classical theory, although earlier contributions were made by the Spanish
scholastics and French physiocrats. Other important contributors to classical economics include
David Ricardo, Thomas Malthus, Anne Robert Jacques Turgot, John Stuart Mill, Jean-Baptiste Say
and Eugen Bo hm von Bawerk.

BREAKING DOWN 'Classical Economics'


Prior to the rise of the classical school, most national economies were based around top-down,
command-and-control government policies. Many of the most famous classical school thinkers,
including Smith and Turgot, developed their theories as alternatives to the protectionist and
inflationary policies of mercantilist Europe. Classical economics became closely associated with
economic, and later political, freedom.

Keynesian Theory

An economic theory of total spending in the economy and its effects on output and inflation.
Keynesian economics was developed by the British economist John Maynard Keynes during the
1930s in an attempt to understand the Great Depression. Keynes advocated increased
government expenditures and lower taxes to stimulate demand and pull the global economy out
of the Depression. Subsequently, the term Keynesian economics was used to refer to the
concept that optimal economic performance could be achieved and
economic slumps prevented by influencing aggregate demand through activist stabilization
and economic intervention policies by the government. Keynesian economics is considered to
be a demand-side theory that focuses on changes in the economy over the short run.

BREAKING DOWN 'Keynesian Economics'

Prior to Keynesian economics, classical economic thinking held that cyclical swings in
employment and economic output would be modest and self-adjusting. According to this
classical theory, if aggregate demand in the economy fell, the resulting weakness in production
and jobs would precipitate a decline in prices and wages. A lower level of inflation and wages
would induce employers to make capital investments and employ more people, stimulating
employment and restoring economic growth.

The depth and severity of the Great Depression, however, severely tested this hypothesis.
Keynes maintained in his seminal book, General Theory of Employment, Interest and Money,
and other works, that structural rigidities and certain characteristics of market economies would
CHELSIE A. BAGSIC Macroeconomics Theory and Practices
BSA III

exacerbate economic weakness and cause aggregate demand to plunge further.

For example, Keynesian economics refutes the notion held by some economists that lower
wages can restore full employment, by arguing that employers will not add employees to
produce goods that cannot be sold because demand is weak. Similarly, poor business conditions
may cause companies to reduce capital investment, rather than take advantage of lower prices
to invest in new plant and equipment; this would also have the effect of reducing overall
expenditures and employment.

- Cure of Unemployment

Deficit Spending

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