CONTENTS

I. II. III. IV. V. VI.

Introduction.2 Theoretical Background..8 Empirical Evidence......................................................................10 Critical Issues12 Conclusion.15 Reference.......16

Introduction Unemployment Unemployment (or joblessness) occurs when people are without work and actively seeking work. The unemployment rate is a measure of the prevalence of unemployment and it is calculated as a percentage by dividing the number of unemployed individuals by all individuals currently in the labor force. During periods of recession, an economy usually experiences a relatively high unemployment rate. According to International Labor Organization report, more than 197 million people globally are out of work or 6% of the world's workforces were without a job in 2012. There remains considerable theoretical debate regarding the causes,

consequences and solutions for unemployment. Classical economics, new classical economics, and the Austrian School of economics argue that market mechanisms are reliable means of resolving unemployment. These theories argue against interventions imposed on the labor market from the outside, such as unionization, bureaucratic work rules, minimum wage laws, taxes, and other regulations that they claim discourage the hiring of workers. Keynesian economics emphasizes the cyclical nature of unemployment and recommends government interventions in the economy that it claims will reduce unemployment during recessions. This theory focuses on recurrent shocks that suddenly reduce aggregate demand for goods and services and thus reduce demand for workers. Keynesian models recommend government interventions designed to increase demand for workers; these can include financial stimuli, publicly funded job creation, and expansionist monetary policies. Keynes believed that the root cause of unemployment is the desire of investors to receive more money rather than produce more products, which is not possible without public bodies producing new money. The employment opportunities of all citizens of a country are impractical due to several reasons. Unemployment of some kind has always been a countrys problem of modern societies, whether developed or underdeveloped

Types of unemployment 1. Voluntary unemployment These are the people who are unwilling to work at the prevailing wage rates and there are some who are lucky enough to get a continuous flow of unearned income from their unemployment status. 2. Frictional unemployment When some workers are temporarily out of work while changing jobs it is called frictional unemployment, to an extent it is also caused if there is a mismatch between job and the workers. Such a mismatch can be related to skills, payment, work time, location, attitude, taste. 3. Casual unemployment In industries such as building construction, catering or agriculture, where workers are employed on casual basis, there are chances of casual unemployment occurring due to short term contracts, which are terminable at any time. 4. Seasonal unemployment Some nature of job exists for only some time. Work in sugar mills lasts for about six months. Rice mills work only for a few weeks; they offer employment for only a certain period in a year. 5. Structural unemployment Due to a structural change in the economy structural unemployment may take place or an absence of demand for the workers that are available. Structural unemployment is also due to technological change.

6. Technological unemployment Advanced countries with capitalistic economy are subject to subject to trade cycles. Trade cycles-especially recessionary phases cause cylinder unemployment in these countries. During the contraction phase of trade cycle in a economy, aggregate demand falls and leads to disinvestment, decline in production and unemployment 7. Cyclical unemployment During the contraction phase of a trade cycle in an economy, aggregate demand falls and this leads to disinvestments, decline in production and unemployment. 8. Chronic unemployment It is when the unemployment tends to be a long term feature of a country. Underdeveloped countries suffer from chronic unemployment on account of the vicious circle of poverty. 9. Disguised unemployment It refers to a situation of employment with surplus manpower, in which some workers have zero marginal productivity so that their removal will not affect the volume of total output.

Specific causes of unemployment 1. In-sufficient rate of development. Even though employment on the whole is increasing, the resent unemployment has increased. This is so as a result of insufficient rate of expansion and not the actual decline of employment opportunities as a whole. 2. Rapid rate of population growth. The rapid rate of population growth in the early fifties has been another cause of increasing unemployment in the country. 3. Increasing output of the Indian universities. The galloping rate at which mass production of matriculates, under-graduates is going on the Indian universities is another cause of the increasing gap b/w employment opportunities 4. Backward character of Indian agriculture. In regard to the colossal rural unemployment and under-employment, the very heavy pressure of population on land and the backward nature of our farming cannot provide employment opportunities for the far-too-numerous rural populace.

Relationship between GDP and Unemployment Rates The relationship between Gross Domestic Product (GDP) and unemployment rates can be seen by the application of Okuns Law. According to the principles established by this law, there is a corresponding two percent increase in employment for every established one percent increase in GDP. The reasoning behind this law is quite simple. It states that GDP levels are driven by the principles of demand and supply, and as such, an increase in demand leads to an increase in GDP. Such an increase in demand must be accompanied by a corresponding increase in productivity and employment to keep up with the demand. GDP and unemployment rates are linked in the sense that both are macroeconomic factors that are used to gauge the state of an economy. A rise in the GDP is significant in the study of macroeconomic trends in a nation. This is also true of a rise or decrease in unemployment levels. GDP and unemployment rates usually go together because a decrease in the GDP is reflected in a decrease in the rate of employment. When a recession occurs, the total amount produced, or GDP, decreases. We know from the study of economic growth that, to produce goods and services, inputs such as labor and capital are needed. The decrease in production means that some of the inputs to production will not be used in production. In general, these idle resources are referred to as unemployed. The type of unemployment most often discussed is the unemployed labor during a recession. Such a relationship between GDP and unemployment rates is important in two ways. A rise in unemployment levels is the natural result of increased GDP levels caused by an increase in consumer demand for goods and services. Such a rise in both GDP and employment levels is an indication that the economy is booming. During such periods, consumer confidence is high and the demand for various goods and services are correspondingly elevated. In order to meet this surge in demand, manufactures and other types of companies hire more employees.
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For example, U.S. employers shed 63,000 jobs in February 2008, the most in five years. On Oct. 1, the Bureau of Economic Analysis reported that an additional 156,000 jobs had been lost in September. In November 2008, employers eliminated 533,000 jobs, the largest single month loss in 34 years. For 2008, an estimated 2.6 million U.S. jobs were eliminated. The unemployment rate in the U.S. grew to 8.5% in March 2009, and 5.1 million jobs had been lost since the recession began in December 2007. The full impact of a recession on employment may not be felt for several quarters. After recessions in Britain in the 1980's and 1990's, it took five years for unemployment to fall back to its original levels. Many companies often expect employment discrimination claims to rise during a recession. The opposite is true in the case of a deflation, which also shows the relationship between GDP and unemployment rates. When there is a dip in the GDP caused by a decrease in consumer confidence and a corresponding reduction in demand, companies must adjust to this low demand. Part of the adjustment process includes the shedding of workers who may have become redundant in the face of sluggish demand by consumers. At times like this, companies look for ways of conserving money since they are no longer making as much money as they used too. One of the cost-cutting measures includes mass sacking of employees whose salaries the companies can no longer sustain. Signs like this are indicators to economists that the demands for goods and services have dropped and that the GDP level is also on a downward slope. Note that even in favorable economic times, the unemployment rate is never zero. The "natural rate of unemployment," or the average rate of unemployment around which the economy fluctuates, is not zero. The natural rate is determined by a number of factors, but in the most basic sense, there is natural turnover in the labor force at all times. During a recession, however, the actual unemployment rate rises above the natural rate.

Theoretical Relationship between GDP and Unemployment Rates Okuns Law In its most basic form, Okun's law investigates the statistical relationship between a country's unemployment rate and the growth rate of its economy. The economics research arm of the Federal Reserve Bank of St. Louis explains that Okun's law "is intended to tell us how much of a country's gross domestic product (GDP) may be lost when the unemployment rate is above its natural rate." It goes on to explain that "the logic behind Okun's law is simple. Output depends on the amount of labor used in the production process, so there is a positive relationship between output and employment. Total employment equals the labor force minus the unemployed, so there is a negative relationship between output and unemployment (conditional on the labor force)." Yale professor and economist, Arthur Okun, was born in November 1928 and passed away in March 1980 at the relatively young age of 51. He first published his findings on the subject in the early 1960s, which have since come to be known as his "law." Okun's Law is, in essence, a rule of thumb to explain and analyze the relationship between jobs and growth. A talk from Federal Reserve Chairman, Ben Bernanke, perhaps most succinctly summarizes Okun's law basic concepts: "That rule of thumb describes the observed relationship between changes in the unemployment rate and the growth rate of real gross domestic product (GDP). Okun noted that, because of ongoing increases in the size of the labor force and in the level of productivity, real GDP growth close to the rate of growth of its potential is normally required, just to hold the unemployment rate steady. To reduce the unemployment rate, therefore, the economy must grow at a pace above its potential. More specifically, according to [the] currently accepted versions of Okun's law, to achieve a 1 percentage point decline in the unemployment rate in the course of a year, real GDP must grow approximately 2 percentage points faster than the rate of growth of potential GDP over that period. So, for illustration, if the potential rate of GDP growth is 2%, Okun's law says that GDP must grow at about a 4% rate for one year to achieve a 1 percentage point reduction in the rate of unemployment."
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It is most important to note that Okun's law is a statistical relationship that relies on a regression of unemployment and economic growth. As such, running the regression can result in differing coefficients that are used to solve for the change in unemployment, based on how the economy grew. It all depends on the time periods used and inputs, which are historical GDP and employment data. Below is an example of an Okun's law regression:

The law has indeed "evolved," or changed over time to fit the current economic climate and employment trends at the time. One version of Okun's law has stated very simply that when unemployment falls by 1%, GNP rises by 3%. Another version of Okun's Law focuses on a relationship between unemployment and GDP, whereby a percentage increase in unemployment causes a 2% fall in GDP.

Empirical evidence between GDP and Unemployment Rates The correlation between unemployment and growth is ambiguous. Bean and Pissarides (1993) examine the correlation between unemployment and (labor and total factor) productivity growth for OECD countries over the period 1955-1985. The authors find weak evidence of a negative relationship between the two over the full sample, but no clear relationship within sub-periods. Caballero (1993) uses quarterly time series data from 1966:1 to 1989:4 for the U.S. and U.K., to find that the correlation between unemployment and per capita growth is unclear: at medium frequencies, it is positive for both countries; while at very low frequencies, it is positive for the U.K. and zero or even negative for the U.S. Results using labor productivity instead of per capita growth are similar. Bruninger and Pannenberg (2002) show that an increase in unemployment is associated with a decline in productivity growth in Europe and the U.S. during the period 1960-1997. Dell'Anno and Solomon (2008) find a negative correlation in the U.S. between quarterly changes in the unemployment rate and the quarterly growth rate of GDP between 1970 and 2004. Most empirical research shows that productivity growth has a negative impact on unemployment. Based on a panel of 20 OECD countries spanning 1960-1996, Blanchard and Wolfers (2000) find that TFP growth has a negative effect on unemployment. Fitoussi et al. (2000) use data for 19 OECD countries over the period 1960-1998 to find that the Hodrick-Prescott-smoothed rate of change of labor productivity has a negative effect on unemployment. Using individual data in the U.K. spanning the period 1982-1999, Zagler (2006) finds that individual value added growth, measured by the GDP growth rate of the region and the sector in which the individual resides, has a negative impact on the individual unemployment rate, which captures the number of days a person spends being unemployed over the entire year. Using a panel of 15 industrialized countries covering the period 1965-1995, Pissarides and Vallanti (2007) find that TFP growth has a substantial negative impact on steady state unemployment, both in terms of the estimated elasticity and in terms of the contribution of TFP growth to the explanation of the change in the unemployment rate. Using historical time series for the U.K. from 1871 to 1999, Hatton (2007) finds that
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faster productivity growth reduces the non-accelerating inflation rate of unemployment (NAIRU) over the long run. However, some studies find that the impact of growth on unemployment depends on the type of analysis being performed. Tripier (2006) describes the empirical co-movements of unemployment and labor productivity growth by means of spectral analysis over 1948-2000 for the U.S. The author finds that the co-movements are positive over the business cycle, but negative in the short and long run. Using a panel of 20 OECD countries spanning 1974 to 1989, Aghion and Howitt (1992) report an inverted-U impact of GDP growth on unemployment. The results imply that countries with too fast or too slow growth rates have relatively lower unemployment rates, while countries with intermediate growth rates suffer the highest unemployment rates.

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Critical issues Causes of Unemployment in the Arab Countries: High unemployment rates in the Arab societies can be attributed to economic, social and political reasons. In addition, it can also be attributed to internal or external causes. The most important causes of unemployment in the Arab countries would be summarized in the high population growth rate, increasing from 218.239 million inhabitants in 1990 to 326.112 million people in 2007. In addition, the most prominent manifestation of the failure in economic development plans is the reliance on foreign loans (for non-oil producing countries) and the lack of systematically economic planning in which there is no match between the educational programs in most Arab countries and the application of policies aiming to open economy in addition to the shift towards privatization programs that have led to abandon large numbers of employees in private and public sector enterprises. Besides, the unsuitable distribution of local resources is considered another important reason of unemployment in Arab world. The Relativity Impact of Economic Growth on Unemployment Rates: The difference in the nature of the growth achieved and its impact on unemployment is what makes economic policies in developing countries fail to reduce unemployment rates although growth rates were fairly high. The economic growth is regarded as a quantitative change occurring in two directions: one associated with an increased labor productivity, which usually does not lead to the creation of additional jobs and the other direction is linked to an increase of jobs, which reduce the unemployment rate according to the nature of the growth achieved. In fact, growth which is associated with increased productivity cannot lower the high unemployment rates. Analysis of Unemployment in the Arab Countries: What distinguish the economics of Arab countries are unusually high rates of unemployment against the international standards. Arab Labor Organization states that current situation of unemployment in Arabic countries is the most dangerous in the world. It indicates also t billion to raise their economic growth rate from 3% to 7% that the Arab economies must invest about $ 70 and create five million jobs, to reduce unemployment rates and to make them within the acceptable rates (Figure 1).
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World Appl. Sci. J., 18 (5): 673-680, 2012

Fig. 1: The needed percentages to reduce unemployment rates.

Fig. 2: The needed growth percentages to reduce unemployment rates.

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The Relationship between Growth and Unemployment: It is noticeable that a significant correlation exists between growth and changing rates of unemployment. High rates of growth indicate the market need for additional labor to be employed from the surplus of the labor force. On the other hand, financial recession increases rates of unemployment due to job loss. It has to be highlighted that there is a weak relationship between the growth rates and unemployment rates; if economic growth gets increased by, for example, 2.0 %, it does not mean that the unemployment rate gets decreased by 2.0%. It is found that the same rates of economic growth do not have the same impact on unemployment in all countries. The Relationship between Growth and Unemployment, a Case of Jordan: As for the relationship between growth and unemployment in Jordan, like some Arab countries it suffers from the abnormal rise in the unemployment rate, consequently affecting development and openness in the Jordanian economy. Analyzing growth rates and unemployment for Jordan shows the direction of the high growth rate and relative decline in the unemployment rate in the period (2006 - 2011).

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Conclusion The correlation between real GDP growth and unemployment is very important for policy makers in order to obtain a sustainable rise in living standards. If GDP growth rate is below its natural rate it is indicated to promote employment because this rise in total income will note generate inflationary pressures. In contrast, if the GDP growth is above its natural level, policy makers will decide not to intensively promote the creation of new jobs in order to obtain a sustainable growth rate which will not generate inflation. The slope of unemployment in Okuns law in around -0.5 and potential GDP growth is around 5.7 percentage points and the variables are negatively correlated as predicted by the theory. These values are particularly important for policy makers in order to obtain an optimal relation between unemployment and real GDP growth. In the previous years, economic growth was above potential which has generated inflationary pressures.

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Reference
1. en.wikipedia.org/wiki/Unemployment 2. http://www.econport.org/content/handbook/Unemployment http://www.investopedia.com/articles/economics/12/okuns-law.asp 3. en.wikipedia.org/wiki/Okun's_law 4. www.jstor.org stable 5. idosi.org wasj wasj 6. thescipub.com pdf . .pdf jssp. . .

7. http://www.econbiz.de/Record/economic-growth-and-unemployment-in-arab-countriesis-okun-s-law-valid-moosa-imad/10003738465

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