Contemporary Issues in Economics

Subject: Economics
Type: Evaluation Essay
Pages: 7
Word count: 1837
Topics: Economic Inequality, Globalization, Government, Unemployment


Globalisation largely contributes towards the development and improvement of various countries as well as has negative effects such as unemployment and income inequality. However, similar types of problems can be generated from the changes that are made by various institutions such as government organisations. Stability can thus be maintained at the time of crises but for some, capitalism economies may face income inequality, thereby leading to increased rate of unemployment (Dufour & Orhangazi, 2014; Ibrahim, 2013). Thus, it can be noted that these two main structural problems may be reduced or increased by globalisation based on the efforts of institutions depending on the situation and the country. Similar structural problems are visible in the capitalist countries due to the operations and functioning of the governmental organizations such as EU or UK. Capitalism, is a type of social formations, as per which, the markets and the commodity products that are involved the country involves the consideration of both the capital as well as the labour market. However, there may be complexities be present in the long-run which in turn leads to market and product diversifications. These changes can have positive as well as negative impacts on the system of a country. In this context, global communication and mobility are the positive effects whereas unemployment and wealth inequality are the negative impacts of such changes in the country of capitalism such as the US and UK. The main reason for such adverse effects is the prevalence of division of labour that is generally brought about by this development and changes. The US and Britain are increasingly facing the problem of income inequality since the year of 1970. On the other hand, Germany has become one of the countries, to attain positive results from these types of changes (Hodgson, 2003). Therefore, in order to address this necessity, the paper has been intended to understand the importance of institutions such as EU and governmental organisations for contributing to the evolution of the two structural problems in the initial part of the essay. In the latter part, the impact of globalisation will be examined in details in the context of similar problems. In addition, to have more detailed understanding, the theory of institutional complementarities will be used to better explain the contribution and its effects on both the problems. Furthermore, the monetary policies that are applied in various countries will be evaluated so as to understand that those policies complement to solve the two major problems or even to increase them.

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Effect of Globalisation on Unemployment and Income Inequality

Positive Impact

According to Hall & Gingerich (2009), globalisation is a process, through which the economic, social, cultural and political relations are intensified within the international boundaries. There are various capitalist countries, which were seeking to increase the trade and relationship between the countries so that their economic conditions can be improved and development can be fostered (Hall & Gingerich, 2009). A similar opinion was provided by Amable (2016) that, the major advantage of globalisation was evident to be economic modernisation and the rise of economic performance of the countries. The historical evidence, therefore, suggests the institutional complementarities theory, when applied during globalisation. It can enable one institutional set to complement another for raising the returns, which can in turn lead towards the positive outcome i.e. rise in economic performance on an overall basis (Amable, 2016). In order to understand the positive impacts of globalization, the general theory can be made applicable. According to Business School (2017), the global theory was applicable especially at the time of economic crisis, which was further propounded by John Maynard Keynes, emphasising the improvement and changes in the context of interest, employment and money (Business School, 2017). Considering the rate of interest, the general theory is that the liquidity preference of an individual in the global scenario will lead to improved conditions. According to this theory, the attempt to derive the interest rate from the amount can later be liquidated by an individual increase in the economic condition of a person, who can improve thereby enhancing the economic performance of the country as a whole in the global context. Hence, it can be noted that applying this theory can be advantageous for an economy but there may be other problems that can be faced at the time when the stock market faces crashed condition. As a consequence, the expenditure decreases which also diminishes the expected rate of return on the investments. Therefore, only with the replacement of old stocks and equipment, one can lead the individuals and the economy as a whole to recover (Swartz, 2009; Schwartz, 2009). 

Negative Impact

According to Bertucci & Alberti (2002), globalisation often leads to the restructuring of the economy, which in turn may lead to increased level of unemployment, maybe on a short-term basis. This implies that there may be various individuals with higher or even lower income, thereby leading to other structural problems i.e. income inequality along with poverty and democracy (Bertucci & Alberti, 2002). Hence, considering these negative impacts, it can lead to the structural problems of capitalism in various countries such as income inequality and unemployment. On the contrary, as per Milanovic (2013), it was observed that inequality between the economies declined in the preliminary stage of globalisation. However, it was tough for some of the countries to sustain this decline. In order to obtain positive outcomes, the mean income of the countries must continue to converge for as long as possible but some of the countries faced severe problems. As a result of this, only the rich-countries were able to sustain and create a premium position in the world while others are facing immense structural problems in capitalism, primarily through income inequality and unemployment (Milanovic, 2013). In the context of institutions, globalisation has been creating various complexities within the capitalist economies. This, in turn, has been evident to increase inequality of skills because the qualified and highly trained employees have a higher income with respect to the unskilled ones. This dispersion of labour further creates many other issues such as unemployment and increased use of robots, which was evident in case of Britain since 1970 (Hodgson, 2003).

Effects of Institutions on Unemployment and Income Inequality

Positive Impact

In response to the increasing problem of unemployment and inequality, it was suggested by Hodgson (2003) that implementing economic policies by the institutions such as governmental organizations that are education-centred can sustain the economic growth as well as address these problems. Moreover, various countries have been applying other policies in order to curb these problems (Hodgson, 2003). In addition, Wright (2016) suggested that other policies that may be implemented by the elite economies are migration policy, social as well as economic policies to enhance their developmental activities (Wright, 2016). 

In a research conducted by Siami-Namin & Hudson (2015), it was evident that the impacts of implementing monetary policies in 66 developing and 26 developed countries were positive. The result of which implied that the governments and institutions of every country must take effective steps to impose tax policies for controlling inflation. This is because indirect taxes create inflation with the increase in income inequality (Siami-Namin & Hudson, 2015). In contrast to these positive outcomes Obadić (2014) stated that changes in the labour market by the government institutions through tax policy implementation can result into positive or negative outcome considering the market conditions. It was further observed that appropriate labour policies were evident to reduce income inequality as well as increase employment opportunities (Obadić, 2014). According to Dufour & Orhangazi (2014), the institutional structure of capitalism along with the government policies often aims to ensure capital and ascertain that the high-income people are safeguarded at the time of financial crisis, thereby leading to the accomplishment of a positive impact (Dufour & Orhangazi, 2014). In addition, Amable (2016) stated that the theory of institutional complementarities is said to be playing an important role while analysing capitalism and has also been widely used for understanding the institutional changes in capitalism. It was hence stated that an institutional complementarities theory can better be analysed based on the changes in capitalism through a critical understanding of the institution’s political economy provided, the economic functionalism is not considered. Along with various theories, the regulation theory evaluated the changes based on the interactions between two social relations i.e. capital labour and market competition. Moreover, if the compatibility between the institutional forms is observed, then the country is said to have positive outcomes. These form the type of integration between the national economy and world system, its state, competition, wage-labour nexus and financial as well as monetary regimes. Determining the efficacy of these forms, the positive impact would be determined by improved living standards, high profits and full employment (Amable, 2016).

Negative Impact

Particularly considering the United States, policies have been introduced to check trade balances and tariffs. The protectionism approach of the government of US in the recent context can impact trade deficit in the global scenario which will, in turn, affect other countries. For instance, imposing Value Added Tax (VAT) in the US will increase the tax on imports whereas posing discount on every export. This implies that exporting goods by other companies will also be costlier with respect to the imports (Wonkish, 2016). Therefore, this shows that countries such as the US and Europe are facing increased income inequality which has been addressed through effective policy implementations (Solow, 2014). In addition, Hall & Gingerich (2009) argued that institutions emphasising only on reforming one sphere of political economy will lead the country to have an adverse effect. Furthermore, applying the institutional complementarities theory, it can be found that if the labour market is not properly coordinated, employment protection can be low, which may, in turn, lead to the creation of Liberal Market Economies (LMEs) or Co-ordinated Market Economies (CMEs). LME is observed to increase income inequality with the CMEs intending to reduce the working hours (Hall & Gingerich, 2009). Therefore, it implies that with the application of institutional complementarities theory, the changes can be monitored, through which effective changes can be made in the capitalism to reduce and mitigate the problems of unemployment and income inequality.


Thus, having an understanding of the importance of implementing institutional complementarities theory and general theory, it can be stated that it is highly essential to analyse capitalism. This information can be used to tackle the problems of unemployment and inequality, especially by governmental organisations and institutions. The implementation of monetary policies such as tax policies must be revised to make it appropriate for the countries to improve its conditions. However, it can be concluded that countries such as the US and Europe were facing these issues since the financial crisis had occurred back in the history and still is evident to be improving the economic performance. This is mainly due to the prevalence of the relationship that is shared among the countries, which have been formed as a result of globalisation. 

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  2. Bertucci, G. & Alberti, A., 2003. Globalization and the Role of the State: Challenges and Perspectives. Reinventing Government for the Twenty-First Century, State Capacity in a Globalizing Society/Rondinelli DA, Cheema G. Shabbir (editors).–Westport, Connecticut (USA): Kumarian Press Inc, pp.17-31.
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  10. Schwartz, 2009. Book VI: Short Notes Suggested by the General Theory. Schwartz, pp. 1-7.
  11. Siami-Namin, S. & Hudson, D., 2015. Inflation and Income Inequality in Developed and Developing Countries. Conference Paper, 2-47.
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  15. Wright, E.O., 2016. Is the Precariat a Class? Global Labour Journal, 2016,Vol. 7, No. 2, pp. 123-135.
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