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Case Study of California

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Chapter 1

Introduction

Unemployment refers to an economic condition in which individuals actively look for jobs and remain jobless.  According to Bureau of Labor statistics, California has the second highest unemployment rate in the nation. “It has hit the highest point in nearly 70 years starkly underscoring how the nation’s incipient economic recovery continues to elude millions of Americans looking for work”. The rate of unemployment is 12.4 percent, 3% higher than the national rate. It is estimated that more than 2.3 million Californians are unemployed.

This high rate of unemployment can be attributed to various reasons.  One of them is economic recession. California has never come out of recession. If things go terrible on a national level, they become tragic in the Golden State. It has affected all the financing companies, which in turn made them, cut off their expenses in order to increase their income by decreasing their employees due to many workers who were laid off their jobs (Rugaber, 2011). Many companies have given more work to the existing employees and delayed hiring new employees. California’s recession was also caused by a large cyclical downturn in the construction industry with its contribution coming from a large downturn in foreign trade, related to the worldwide recession (Tucker, 2008). Another reason that has led to high unemployment is the steep decline in the construction spending, leading to more people being unemployed. It is important to study the problem of unemployment so that one can plan for the future by starting own business in order to generate his /her own income and become self-employed. The methods one should use to collect data are direct observation, questionnaires and interviews.

1.1Background

Employment affects people directly in their life, and it remains one of the greatest challenges especially in developed countries. Unemployment in California’s labor force has been experienced since the industrial era. The government of California has formulated and implemented several policies to ensure that the market generates enough jobs for the rapid growing labor force. The California government has made use different policies to create employment opportunities and sustainable growth in labor force in the country.

1.2Statement of the problem

Unemployment is a rampant problem that has greatly affected the economy of California State. This relationship can be best explained using the Okun’s law, which remains one of the cornerstones of macroeconomics Mingyu (2012). This example is best applicable in the state because it shows how much the high rate of unemployment has affected the economic conditions in the state of California.  The law postulates the inverse relationship in the unemployment rate and the real G.D.P growth rate. It is used practically in the formulation of policies decisions and evaluation by both government and industries. It is also one of the crucial components of macroeconomics models that link output and labor market. Unemployment of labor force in California has been observed to increase for a long duration of time while there has been a change of California’s G.D.P rate due to the business cycles. There has been a negative relationship between the labor unemployment and the state’s G.D.P growth rate. This relationship is known as the Okun’s law, which stipulates that, the relationship between unemployment in labor force and the output is inverse (Yi. W & Mingyu, C. 2012).

California’s unemployment rate has drastically affected the California economy whereby there has been a reduction in the economy growth rate in different years due to different reasons. This   relationship explains that the Okun’s law  holds in California economy, but the main problem is whether the Okun’s coefficient in California is statistically significant. Hence, the results observed should be able to explain the rigidity of the labor force in California. According to different policy documents, the state’s employment problem is manifested in slow growth of formal sector and a rapid increase in the people who are self employed. In the California labor market, there have been different causes of unemployment in labor due to the nature of unemployment. In order to understand this, an analysis should be conducted on the data showing the trends of the California unemployment in relationship to its G.D.P growth.

The analysis would show whether the different policies formulated by the government were effective. It would also explain the nature and the main determinants of labor employment.  Studies have been conducted in order to understand the nature and cause of unemployment in California, where they both identify the major causes of unemployment as rapid growth of labor force, Low economic growth rate, job selectiveness, seasonality of some of the industries and skill imbalance. Over the years, the government has formulated and implemented different policies, which mainly focus in reducing unemployment and creation of employment opportunities that are income generating thus would lead to improvement in standard of living and Reduce of poverty (Employment development department, 2012).

1.3Research question

            In respect to the problem statement there are several questions that need attention. The following questions are:

  1. Does Okun’s law hold in the California economy to measure the cost of unemployment?
  2. What is the trend of labor unemployment in California in relation to its real GDP Growth?
  3. What policies and measures has the government put in place to deal with the rising cases of unemployed people?
  4. What are the determinants and nature of unemployment of labor in California?
  5. What are the policies formulated by the government to ensure a sustainable         employment growth in the country?

1.4 Objective of the study

1.4.1 General objective

 In respect to the research questions, the general objective is to verify whether or not the Okun’s law holds and to show the rigidity of labor force in California’s economy taking into consideration the trend of employment of labor in California in relation to its real G.D.P growth rate.

1.4.2 Specific objective

i.          To show the trend of labor employment in California in relation to its real G.D.P.

ii.         To identify the nature and the determinants of unemployment in California.

iii.        To identify the policies formulated by the government to ensure a sustainable employment of labor.

iv.        To identify the Okun’s coefficient in California and assess whether it is statistically significance

1.5 Statement of research purpose

This study aims to hypothesize that the high unemployment rate in the state of California is taking a negative toll in the economy of the state. The research will apply macroeconomic concepts like the Okun’s law, taking into consideration the trend in unemployment of labor in relation to California’s real G.D.P growth rate. The study mainly analyzes data from 1990 to 2012 and the variables used include the real G.D.P and the unemployment rate in California’s labor force. It will show the existence of a negative relationship between the two variables. It will also explain the nature of unemployment, causes of unemployment and the various measures taken by California’s government to deal with unemployment in California.

1.6 Methodology

The research aims at postulating whether Okun’s law holds in California’s economy and show the labor flexibility in the labor force. The study takes into consideration the unemployment trend in California in relation to its changes in real G.D.P growth rate. Therefore, the development of this research followed an approach of Okun’s case study  in employment-output relation. It uses both quantitative and qualitative approaches in analyzing and interpreting data. The study relies on secondary data collected from relevant literature, economic journals, government policy documents and report published by international agencies.

1.7 Scope and limitation of the study

The study would gather secondary information mainly from government journals, research paper of different local and international institution, government reports and Economic theory. The study would be limited to data between 1990 and 2012, and it focuses mainly on the changes in the California unemployment rate in relationship to its real G.D.P growth rate.

Chapter 2: Literature review

Unemployment refers to a situation where people who are able, ready, qualified and willing to work at the prevailing wage rates are not able to find jobs. According to a population survey  carried out in California, the unemployment rate for California as of may 2012 was 10.8%, which was 0.1% drop from the previous month. This rate was alarmingly higher than the country’s unemployment rate, which at the time of the survey was 8.2%. This data gets explained better in the table below

Unemployment rate as of May 2012                     Month/Month                 Year/Year

National

8.2%

+0.1

-0.8

California

10.8%

-0.1

-1.1

This means that there is excess supply of labor in the labor market, which can be translated into W= -f (Ns-N d). W represents growth in money wages. The data above shows that there is excess supply of labor in the labor market, which can be translated into W= -f (Ns-N d). W represents growth in money wages. The above equation changes when unemployment is added as a variable. W=g(U)  g≤ 0. U is the unemployment rate, given that the supply of labor is in excess. These equations represent the labor market in California where qualified and willing individuals lack job opportunities. This translates negatively on the states and nations economy. This relationship can be explained better using Okun’s law, which stipulates that for every 1% increase in the rate of unemployment, the G.D.P of the country  decreases with at least 3%. (Yi. W. & Mingyu, C. 2012). This law shows the relationship between G.D.P and Unemployment, which in this case is an inverse one. Although there are many types of unemployment, the most persistent one in California is the open involuntary unemployment. This is where people are looking for jobs, but they cannot find any. This occurs in a scenario where the demand for labor is lower than the supply.

2.0 History of California’s unemployment rate

According to the employment development board in California, over two million people have already exhausted their unemployment benefits over the years. This has rendered so many of them homeless and desperate to get a source of income. The unemployment rate in California has been proved to always be higher than the national unemployment rate; this can be shown using the table below which shows the unemployment rates of the year may 2011-may 2012. According to the statistics, over 2million people each month are unemployed. This means over 2 million families  left at the mercy of the society. This has greatly affected the living standards of many people in the state, and eventually leading to a decrease in the countries and states G.D.P and G.N.P

Date

National unemployment rate

California’s unemployment rate

Number of unemployed people

May 2011

9.0

11.9

2,176,060

June 2011

9.1

11.9

2,186,558

July 2011

9.1

11.9

2,189,569

August 2011

9.1

11.9

2,177,981

September 2011

9.0

11.7

2,153,005

October 2011

8.9

11.5

2,121,540

November 2011

8.7

11.3

2,089,833

December 2011

8.5

11.2

2,060,109

January 2012

8.3

10.9

2,019,491

February 2012

8.3

10.9

2,012,350

March 2012

8.2

11.0

2,031,074

April 2012

8.1

10.9

2,006,458

May 2012

8.2

10.8

1,993,947

2.1Causes of the unemployment

One major contributing factor that has led to the increase in the unemployment rate in the state is the fact that most employers discharged their workers because of the economic crises in the country. Employers are also spooked by the European debt crises and the stock market slide; hence, they are opting to hold off hiring for the time being. This is because of the aspect of wage rigidity e.g. once an individual gets employed, their wages are expected to increase irrespective of the financial situation. Hence, employers tend to limit the new entrants into the market as a way to avert risk and unnecessary expenses (HealthCal.org 2010).

The government is also to blame for the high unemployment rate in California. This is due to the fact that they have trimmed their expenditures by cutting positions resulting in the loss of over 3600 state government positions. According to the Employment Development Department (2012) even the construction and information sectors are discharging workers. This high rate of unemployed people in the state has led to a decline in production in the state, hence, a decline in the G.D.P. Most of the citizens living in California have already exhausted their unemployment benefits and, thus, are living below the federal poverty level. Some of the people, interviewed during the study, stated that they had to sell off their assets in order to survive. Some even had to move into shelters for homeless just to survive. This is unbelievable, especially since most of these people are well educated and qualified (Tucker 2008).

The recession is also a major contributing factor to causing the high rate of unemployment. This is because so many companies collapsed and the cost of living shot up. As a result, many companies had to discharge their workers in order to avoid bankruptcy. Thus, the number of unemployed people got raised. This is showed in the graph below.

2.2 Consequences of the high rate of unemployment

The high rate of unemployment in the state of California has had its fair share of consequences. For instance, the state’s G.D.P and G.N.P have greatly decreased making the conditions in the state worse. The productivity of the people has been limited by the available wages as well as other market imperfections that have rendered many of them jobless. This decline in productivity has increased the cost of living. Commodities cost more than before, and the people have to pay more for the most basic commodities. Another consequence is the increase in the rate of criminal activities. It is attributed to the people’s desperation to get income to survive. This has resulted in many people turning to crime, and those unfortunate to get caught end up in prison. Their families are thus left helpless, and the vicious cycle continues. This has also led to a poor environmental state in the cities. Massive numbers of homeless people put up shanties in allies for shelter. Brain drain is also a common occurrence in the state. There are many qualified and highly educated people in the state, who are unemployed. Thus, many of them opt to migrate to other states or countries in search of jobs. For this reason, those individuals left behind cannot meet the demand for commodities since the manpower is limited. California’s unemployment rate has drastically affected the California economy whereby there has been a reduction in the economy growth rate in different years due to different reasons. (Tucker 2008)

Underemployment

This is a situation whereby people are working in a lower capacity than they are qualified for. Mostly, the individuals are underpaid or work for less hours than they would want to. These employees work part time instead of full time and others are in a position that they are overqualified for (International Labor Organization, 2012).

Under employment entails underutilizing the skills and productivity of the staff. This can mainly be due to inadequate resources, lack of enough jobs and also due to poor in flow of information in the labor market. For example, an office with fewer computers than the staff could necessitate some staff taking turns at the desk; this would result in a waste of time and production. In addition, there is a rise in the demand for jobs and people end up settling for jobs they are overqualified for just to make ends meet. There is also the aspect of inadequate information flow where the employers are not able to effectively communicate about job opportunities. Thus, people end up going for other jobs outside their expertise just to earn income. Thus, underemployment can be explained as a consequence of unemployment.

Chapter 3. Research Methodology

3.0 Introduction

This chapter describes the procedures that have been followed to conduct the study. It gives an analysis of the research methodology adopted in the study.  It comprises of research design, population, site selection, sampling, data collection criteria, data analysis and presentation of the study findings.

3.1 Site Selection

California is a state located in the United States, in the western coast of the country. Though regarded as well-off region in resource endowment, unemployment still remains a big problem amongst the local community and the country’s economy as a whole. California is chosen as the area for study as it is where the unemployment rate is most prevalent and alarming.

3.2       Research Design

This study used correlation research design to establish factors affecting employment. The design was preferred since it guarantees the researcher a complete and precise description of the situation, while ensuring there is minimum bias in the process. This helps to reduce the possible mistakes in the research. According to Nabaz. N .J (2011), correlation study is whereby one has two or more quantitative variables from the same group of subjects, hence the variables can be correlated. This assisted the researcher in describing the phenomenon under study, which was to establish the factors employment opportunities in the state. It also provides a detailed and highly accurate picture that can locate new data that confirms or contradicts the existing literatures.

3.3 Populations and Study Sample

There were two types of population  focused on in this study. The target population also called a universe. The target population of this study was California. The population of the study included the city of Los Angeles. Statistics from the employment agencies, as well as, government records like the unemployment benefits agencies will be used to analyze the unemployment rate in the state. This information will be used as a population frame.

3.4 Samples and Sampling Technique

The data used for this study was mainly derived from official sources and documented materials from census and other statistical data regarding the state of California.

3.5 Data Collection Procedure

Secondary data was applied in the study. This was expected to facilitate collection of accurate information and clarifying it appropriately for this study. The questionnaires were developed and circulated to the respondents at their homes and workstations. The questionnaire was preferred because of its ability to collect data from a large group within a short period. On the other hand, secondary data was collected using reviews from both existing empirical and theoretical literatures. The literature was sourced from various sources such as library, online journals, the Internet and any other relevant databases.

3.6 Data Analysis and Presentation

The data collected was processed, coded and systematically organized in a manner that facilitated analysis, using the Statistical Package for Social Sciences (S.P.S.S). Then, categorizing, tabulating and recombining evidences to address the research questions analyzed the qualitative data. Quantitative analysis was achieved through descriptive statistics such as a measure of central tendency to generate relevant percentages, frequency counts, mode, and median and mean where possible.


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