Human wants are generally insatiable, yet the means of ensuring these wants are limited simply because the world has only limited amounts of resources which comprise of human wants that are grossly limited both in number and skills (this is where unemployment arises). Recession happens if output in the economy reduces, this is to say that growth becomes negative. When people spend less, shops will be left with unsold stocks, which will result in purchasing less from the producers, which in turn will cut down on production. Unemployment is likely to result from cutbacks in production. When firms produce less, they need fewer employees.
Several countries regardless of their economic status have experienced various degrees of unemployment since the economic downturn in 2007. The U.S economy had an unemployment rate of 9.2% as at June 2011, Egypt with a 19% unemployment rate and the Saudi economy of 10%. This is very costly economically because it represents a loss in the GDP.
The classical theory analyzed by Pigou (1993) and Solow (1981) argues that the labor market consists of demand and supply of labor. The demand curve is a negative function of real wage in that if wages increase, the quantity demanded for labor will decline and the opposite is correct. Because one is employed does not mean that others are not unemployed. Cheaper labor to entrepreneurs is the most effective way to reduce unemployment. Technological advancements will cause a rise in the number of unemployed but these unemployed will also search for other jobs but this search is likely to reduce wages. Wage reduction is not a complete way to increase employment. Organizations look out for skilled workers who in turn look for better paying jobs which leaves everyone searching until they are reached.
The German economist, Von Mangolt, originally developed unemployment in the theory of innovations. He stated ways in which businessmen can make profits. These ways are locating specific markets, acquiring productive representatives, and a combination of all the factors of production including innovation. Innovation, which creates more jobs relative to job destruction, is the basic force behind the increases in employment and the decreases in unemployment. When entrepreneurs create something new, local investment spending will increase demand on economic resources and will increase their prices.
Keynes (1936) in the unemployment theory of demand considers unemployment as an involuntary phenomenon. He thinks that employment is recurrent, generated by the lack of aggregate demand. Investors hire workers and invest to produce output when the expectations about economy and profits are high. If expectations about the future are supported by reality, investments and employments continue rising until equilibrium is attained by the intersection of the aggregate demand and supply- the point of the effective demand which may be less than the full equilibrium.
The argument in the theory of...