Unemployment in Greece: Causes and Effects

This paper discusses the causes and effects of unemployment in Greece, including long-term and cyclical unemployment, frictional and structural unemployment, and the impact of the financial crisis. It also suggests recommendations for the government to stabilize the unemployment rate.

Page 1 of 5
ECONOMICS ASSIGNMENT

Page 2 of 5
The economy of Greece has been going through a lot of turbulence and its
repercussions have affected many indicators of macroeconomics. Unemployment is one such
macroeconomic indicator of the country which has been severely affected. The aim of this
paper to answer questions related to the unemployment in Greece.
The unemployment of Greece is measured by taking the percentage of the labours
who are working out of the total workforce of the country. In the case of Greece, the
unemployment has been similar to the figures of European Union as a whole till 2008 (Farber
& Valletta, 2015). However, due to the financial mismanagement and the crises after the year
2008 the unemployment rate fell sharply compared to the European Union.
Figure 1: Unemployment rate in Greece compared to the European Union as a whole
(Source: Kroft et al. 2016)
There are two types of problem in the country in terms of unemployment. First one is
the long run unemployment which is also called the natural rate of unemployment. This is not
the result of the mismanagement it has committed in the past. Another problem of the
economy is the cyclical unemployment which fluctuates around the normal rate as a result of
the changes in the business cycle and the national product of the economy. Menzio (2016)
stated that negatively sloped GDP of the country also reflects in the employment of the
country as well. According to the figure 2, the falling GDP of the country shrank the
economy increasing the frictional unemployment in the economy.

Page 3 of 5
Figure: 2 Falling GDP of Greece
(Source: Kaplan & Menzio, 2016)
In the case of Greece, the unemployment rate is not measured correctly as it does not
include many types of individual in the overall labour participation of the country. Kaplan &
Menzio (2016) pointed out that it does not include the individuals who have stopped looking
for jobs. Taking advantages of inaccuracy the individuals, despite not being unemployed
claims the benefits from government increasing the burden of the government even more.
Since the financial crisis in the year 2008, the overall GDP of Greece started to fall at
a steady rate. Hence the long term problem of the country in terms of unemployment is
increasing normal rate unemployment which has increased to 20.1% in the year 2016. Apart
from that, the short run short run cyclical rate of unemployment is also there relating to the
fluctuations in the business cycle of the Greek economy.
The main reason for the unemployment in case of Greece is the lowered foreign
investment in the economy. Job market shrank following the crises survived by the country in
the year 2008. Therefore the shortage of demand for labour is the main cause of
unemployment in case of this country.
The government of the country, in order to increase the labour productivity,
introduced the efficiency wage in the year 2009. However, as the theory suggests the
unemployment of the country increased more than the increase in the productivity of the
labour.

Page 4 of 5
Figure 3: The efficiency wages
(Source: Weiss, 2014)
Frictional unemployment is the major component of severe unemployment in case of
Greece. Since the dip in the GDP of the country, the average time to get a job has increased
and hence the frictional unemployment increased.
Structural unemployment in Greece arose as the labour requirement for unskilled
labour reduced. These unskilled labours were of no match for the existing technical jobs of
the economy leading to an increase in the structural unemployment.
Currently, the unemployment figure of Greece stands at 20.1% which is very high
compared to the other nations of the world. It is in equilibrium only because of the presence
of demand for skilled labours. It is recommended to the government to increase government
spending against increased inflation as it would stabilise the unemployment rate of the
country.

Page 5 of 5
Reference
Farber, H. S., & Valletta, R. G. (2015). Do extended unemployment benefits lengthen
unemployment spells? Evidence from recent cycles in the US labor market. Journal of
Human Resources, 50(4), 873-909.
Kaplan, G., & Menzio, G. (2016). Shopping externalities and self-fulfilling unemployment
fluctuations. Journal of Political Economy, 124(3), 771-825.
Kroft, K., Lange, F., Notowidigdo, M. J., & Katz, L. F. (2016). Long-term unemployment
and the Great Recession: the role of composition, duration dependence, and
nonparticipation. Journal of Labor Economics, 34(S1), S7-S54.
Weiss, A. (2014). Efficiency wages: Models of unemployment, layoffs, and wage dispersion.
Princeton University Press.