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 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 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
1) Free Competition for Jobs
But what is the appropriate relationship between wage-rates and prices? How can such a magic
relationship be established?
Nothing could be simpler. Allow every person looking for work to accept a job at the highest wage he
can get. Let him bid freely. This is a job for individuals. Only individuals, acting as flee, responsible
persons, can solve the problem. The cure for unemployment is free competition for jobs. Only a free
market can arrive at the appropriate relationship between wage-rates and prices.
2) Minimum Wage Laws
Minimum wage laws have the same restrictive effect as collective bargaining. They destroy the
natural right of certain persons to bid effectively for a job. By raising wages by force, or the threat of
force, above the free market wage, it is decreed, absolutely, that some will not be hired who wish to
be hired. This is especially sad because it victimizes the young, the uneducated and the
inexperiencedthe very poorest of the would-be competitors in the labor market. It keeps some
from ever getting on the ladder of accomplishment, and thus creates frustrations that often lead to
drugs and crime.
3) Remove the Chains
That trouble is haunting us in the form of the twin diseases of unemployment and inflation. Only a
free market for goods and services can bring about the price and wage adjustments necessary to
cure those diseases. Modern development of data processing and communication is rapidly
becoming so potent that such essential adjustments can be accomplished in short order. Millions of
individuals, each acting in his or her own best interest in view of his or her present circumstances,
can arrive at the best possible solutions pronto. All that is necessary is to remove the shackles.
4) Minimizing Business Cycles
It could be shown that, so long as we have fractional reserve banking, we seem bound to experience
business cycles, and that a practice of free competition for jobs and free competition for help tends
to dampen the swings. Not only can full employment be hastened during the downswing by bidding
wages down as necessary, but rapidly increasing wages during the upswing would have some
tendency to lessen the overinvestment that occurs in times of euphoria. That a free market for help
is superior to present-day collective bargaining at such times was demonstrated in the upswing in
the economy induced by the Kennedy tax cuts of the sixties. Wages in the unorganized labor areas
frequently rose more rapidly than in the unionized areas.
5) Mutual Assistance
ent of workers will naturally improve as they are brought to realize that by increasing their value to
their employers, they are increasing their value to all mankindthat by gaining increases in their
wages in this manner, they are doing the whole world a favor. In the last analysis, we are all working
for each other, with employers functioning as the essential go-betweens, organizing the whole
process. What a difference there is in gaining pay increases by increasing ones value as compared
with gaining them by forcing unknown workers out of competition by the threat of violence!
6) The Power of the Market
In the early days of the Industrial Revolution, as efficiency and productivity increased with capital
accumulation, this power of the market to dictate higher wages and better working conditions
became so annoying to employers that they succeeded in getting maximum wage laws passed. As
troublesome as such laws must have been, they were no match, ultimately, for the dictates of the
market. Living and working conditions for the working classes continued to improve, and the
maximum wage laws were either repealed or became dead letters.
Deficit Spending
What is 'Deficit Spending '

Deficit spending occurs whenever a government's expenditures exceed its revenues over a fiscal period,
creating or enlarging a government debt balance. Traditionally, government deficits are financed
through the sale of public securities, particularly government bonds. Many economists, especially in the
Keynesian tradition, believe government deficits can be used as a tool of stimulative fiscal policy.

BREAKING DOWN 'Deficit Spending '

Deficit spending is an accounting phenomenon. It is only possible to engage in deficit spending when
revenues fall short of expenditures. However, nearly all of the academic and political debate
surrounding deficit spending focuses on economic theory, not accounting.

Deficit Spending and Economic Growth

Deficit spending is often misinterpreted as a pro-growth policy tool. This may be because deficit
spending is positively correlated with gross domestic product (GDP). However, since one of the key
components of the GDP equation is government spending, it is tautological and not empirical that the
two tend to rise and fall together.

As Keynes articulated, the main role of deficit spending is to prevent or reverse rising unemployment
during a recession. Keynes did believe there could arise a secondary benefit of government spending,
something often called the multiplier effect. According to the theory, a single dollar of government
spending might increase total economic output by more than $1.

There are plenty of theoretical and empirical challenges to the notion of the Keynesian multiplier. A
huge series of econometric tests have been run, with various and inconclusive results.

If left unchecked, some economists argue, the effects of deficit spending pose a threat to economic
growth. Too large a debt, wrought by consistent deficits, might force government to raise taxes, pursue
inflationary monetary policies, or default on their debt obligations. Additionally, the sale of government
bonds crowds out private issuers and might distort prices and interest rates in capital markets.