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Although the global economy is recovering slowly, the depth of the recession in 2008-2009 has left it in a very fragile state and unemployment is expected to be high for some years to come.
Unemployment levels vary not only between advanced and developing economies, but also within advanced economies as a result of various measures adopted by governments to curb rising unemployment. It will be one of the biggest challenges faced by governments and consumers in 2010.
Unemployment is what’s known as the third wave crisis, after the financial and economic crisis in 2008-2009. It will continue to climb in 2010 and Euromonitor International forecasts that unemployment levels in many economies like the eurozone, Turkey and Russia are expected to be in double-digits in 2010.
This is because unemployment is a lagging indicator – an economic indicator that is based on past occurrences rather than ones predicting future economic scenarios. In this case, unemployment rates change after changes in real GDP growth.
Employers generally try to avoid making redundancies – they cut overtime or reduce working hours before they make people redundant. Therefore, unemployment is not expected to stop growing until after 2010. It is also slow to recover for the same reason. Before braving taking on new employees, employers tend to use overtime to make up for any shortfall in labour.
Since the advent of the crisis, youth participation rates have been on a downward trend in almost all countries and concerns over youth unemployment are elevating. In 2009, youth unemployment – defined as people between the ages of 15 to 24 – stood at 13.4% globally, according to the International Labour Organisation.
The youth are in a disadvantageous position in labour markets. Discouragement regarding current job opportunities result in decisions to postpone labour market entry, which has a negative effect on the labour force participation rate for youth.
The largest increase in youth unemployment is seen in advanced economies, especially across Europe. Inadequate training and wide-spread use of short term contracts during the global economic crisis have resulted in high levels of youth unemployment.
By the end of 2009, the unemployment rate amongst those under the age of 25 in the EU-27 rose to 21.4% from 16.9% during the same period of 2008. Nonetheless, the jobless rate among youths varied greatly across the European Union, from a low of 7.6% in the Netherlands to a high of 44.5% in Spain in December 2009.
Cyclical unemployment occurs when unemployment rises as a result of falling aggregate demand. It arises during economic downturns like the Great Depression or the global economic crisis of 2008-2009 and is likely to fall as economic activity picks up.
Structural unemployment, on the other hand, occurs when the number of jobs in the labour market cannot provide employment for all who want to be employed. It arises from a mismatch between the sufficiently skilled workers seeking employment and demand in the labour market. Even though the number of vacancies may be equal to the number of the unemployed, the unemployed workers may lack the skills needed for the jobs — or may not live in the part of the country or world where the jobs are available.
Persistent cyclical unemployment may cause structural unemployment. Many believe that long-term unemployment in the USA might transform into structural unemployment. As the economy emerges out of recession and job creation begins, given excess capacity and inventory build-ups it is possible that new jobs created will not necessarily be in industries which have seen mass-layoffs, hence creating a skills mismatch.
Labour markets have weathered the crisis differently due to existing underlying problems in some economies. For example, the USA, the United Kingdom, Spain and Ireland have seen unemployment shoot up significantly compared to Germany which appears to have hardly suffered so far.
The rise in unemployment has a dampening impact on economic growth, particularly during a recovery after a recession. It stifles economic growth by weakening consumer demand, thus lengthening the recovery process.
With growing job losses, consumer spending remains low. Even those in employment are uncertain about what the future holds for them and hold back spending. As a result, overall consumer morale remains low and consumer confidence in many economies was still below pre-crisis levels by the end of the first quarter of 2010.
Euromonitor International forecasts that consumer expenditure in the EU will reach its 2008 level only by 2012.
Among advanced economies, while Germany and Ireland will see a marginal decline in 2010 before growing in 2011 and consumer spending in Spain is expected to start rising in 2012, Canada and the USA are expected to see spending rise by 2.1% and 1.9% respectively in real terms in 2010. Despite the likelihood of suffering from high rates of unemployment in 2010, emerging market economies such as Russia, South Africa and Turkey will all see a rebound in consumer expenditure in 2010.