Unemployment Is a Significant Issue Research Paper

  • Length: 15 pages
  • Subject: Economics
  • Type: Research Paper
  • Paper: #15014748

Excerpt from Research Paper :

This is what has led to so many foreigners working in the country already. The foreign workers are therefore a symptom of a greater problem. This problem is not macroeconomic failure -- the Saudi economy is robust and creates jobs -- but is simply does not recognize that macroeconomic principles alone will not address the issue of unemployment among Saudi nationals.

Consider the case of China as corollary. In both countries, there has been an increase in aggregate demand, and this has created more employment opportunities. An increase in aggregate demand leads to more jobs, and often better jobs than would have existed before. Often, the new jobs created are in low-wage sectors, either in manufacturing or the service industry. While Saudi Arabia has tried to create new jobs at the high end of the market, there is a natural multiplier effect. Each new high-wage job creates multiple new low-wage jobs that serve as support. This occurs because high-wage individuals have much higher demand for goods and services as their spending increases. Thus, if the Saudi government creates ten new high-wage jobs, several low-wage jobs will also be created to support those high wage jobs. The problem for Saudi Arabia, in contrast to China, is finding people to fill the jobs. In China, there is a large class of migrant laborers, peasants from villages and other poor who have no means of support other than their own labor. They are willing to accept low wage jobs because they have no other choice. Education standards are poor in China, especially in rural areas, and the country has no social safety net. The conditions of the Chinese labor market, incidentally, mirror those of the labor markets on the Indian subcontinent. Instead of migrating to Guangdong or the Yangtze Delta, workers on the subcontinent migrate to the Arab nations to take on low-wage jobs and acquire security for themselves.

In macroeconomic principle, these positions could be filled by Saudis. There is a gap in terms of willingness that exists, and microeconomics can explain it. The social safety net in Saudi Arabia plays a role, creating disincentive to accept low-wage work. The differential cost of living and wages between the subcontinental countries and the Arab countries is also a contributor. There is also an underlying sense of duty that Saudis have -- they see that they have a wealthy country, they want to support a large family, and these are not things that can be accomplished with low-wage work.

The problem, then, is not that Saudi Arabia needs to create jobs. It needs to create high-wage jobs. These are the jobs for which nationals are qualified, given the university education, and these are the jobs that they will accept. Creating high-wage jobs, however, is not as simple as wanting to. Macroeconomic models are not based around the idea that growth should be specified. A certain degree of distribution is assumed -- if the economy grows there will be growth in all categories. In reality, growth never happens evenly. Some sectors grow rapidly while others stagnate. To understand the dynamics of differential growth among sectors, we need to turn to microeconomics.

Basic Microeconomic Principles

Microeconomics focuses on the economics of individual decisions. Macroeconomic outcomes, including unemployment rates, are built on the foundation of individual decisions. A manager chooses to hire a Saudi; a Saudi chooses to accept an available position. Understanding how these dynamics work is critical to understanding the nature of the unemployment problem, and more importantly how to deal with that problem.

At the heart of microeconomic decision-making models is the idea of opportunity cost. Every decision involves tradeoffs, and there is a core assumption that individual actors will be rational in making those decisions. To account for the reality that rational decision making is not always about money, the idea of utility is substituted for money. Utility refers to the total benefit that someone receives for their decision. When applied to the concept of rational decision making, the simple maxim is that people will make decisions that increase their utility. They will undertake decisions that maximize their utility. In basic principle, a person will accept a job only if he thinks that his life will be better.

When comparing Saudi Arabia to a country like China, the role of the social safety net becomes important. The Saudi government provides benefits to its nationals, including unemployment benefits, housing allowances and other social programs (Sullivan, 2012). While these programs are believed by some observers to be a means by which the government quells the natural unrest that comes from conditions of poverty, such programs also create a baseline utility against which employment must compete. An unemployed Saudi national might not live a great life -- there are an estimated 16 million Saudis whose lives are solidly middle class -- but existence is comfortable. . When provided with housing and income for performing no work at all, it can be difficult to convince somebody to take on low-wage work.

This is explained with fundamental microeconomic principles. The low wage work is likely to pay more than social assistance. If it does not, then clearly no Saudi would take low wage work, as it would involve greater effort but a lower standard of living. But even if the low wage work paid more than social assistance, there is a tradeoff in terms of the rigors of life, especially given the manual nature of much low-wage work. The marginal gain in utility from having slightly more money is offset by the marginal decline in utility from having ample free time. It costs little, it should be remembered, to sit and drink coffee all day, or to watch football. If one's life is worsened by the decision to take a low wage job, then one will not take that job. If we contrast this with China, or the Subcontinental countries, where social assistance programs are minimal if they exist at all, Saudi faces a much different situation because of the marginal utility associated with low wage work. For Chinese or Indians, there is a high marginal utility associated with low wage work, so they accept that work. For Saudis, the marginal utility is insufficient to compel them to engage in low-wage work.

An additional complicating factor is the prevailing labor market conditions. Under normal conditions, an educated worker is more valuable than an uneducated worker. This is universal, and applies to any economy. Knowledge is more productive than muscle, and therefore is costs more. Thus, educated workers all over the world seldom wish to seek out menial, low-wage work. They have the ability to earn more, and see spending time in low wage jobs as needless reducing their value on the job market. Moreover, education tends to make one more aware of international job markets. If university-educated people in America or Europe are working as managers, then most Saudis would surely feel that they should be doing the same. The problem, of course, comes with supply and demand.

In most other countries, the university education has high value because the aggregate demand for educated workers outstrips supply. As we know from the standard as-AD curve, as demand grows relative to supply, the price of the good increases. In the West, as more people graduate from university, the value of university graduates is declining. In those countries, however, the number of university graduates is constrained by barriers to entry to university, especially cost. In Saudi Arabia, the barriers to entry to higher education are lower, and therefore there are more graduates. This pushes the equilibrium point down the as-AD curve, lowering the value of such an education in the marketplace. With limited labor market flexibility -- Saudis cannot readily go to other countries to seek employment -- most Saudis are forced into a job market where their skills are undervalued compared with what value those skills might have in most countries. Further, the economy has simply not created enough jobs for all university graduates to fill, unless low-wage labor is taken into consideration.

Full employment can only be achieved if there is a match between the skills of the workers and the jobs available in the marketplace. General economic growth is not enough, even when the growth in GDP is matched by growth in employment (which is Saudi Arabia is not usually the case). The reason for this mismatch is that there is a high level of government intervention in the market. In particular, the policy of free university education creates a situation where the price of education does not align with its value in the economy. If there were opportunity costs to consider, fewer Saudis would pursue university education. Without opportunity costs, more Saudis study than otherwise would. The result is market failure in the Saudi labor market, where there are simply not enough high-wage jobs for the number of people who are qualified to hold…

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