Unemployment and corruption

The fact that unemployment causes corruption is well established and makes sense both from common observations and rigorous theoretical points of view. However, the fact that corruption also causes unemployment can struck one as a total surprise. To make an analysis of this unusual relation, we first need to work out: what type of corruption can contribute to or create unemployment? Does corruption cause unemployment for general labour such as day-labourers or low-class factory workers? Or, does corruption cause unemployment for semi-educated labour such as administrative workers or high school or college graduates? Or, does corruption cause unemployment for highly educated labour such as university graduates?
It is a specific group of people that is hit by corruption, not labour in general. This is the one reason why the reverse relation - corruption causes unemployment - is often get washed by the aggregation of data in empirical estimates and we see no relation. To derive the relation we need group-specific estimates and then we can clearly observe the positive relation between unemployment and corruption - the higher the level of corruption, the higher level of unemployment for the specific group of people will be and vice versa. So, in developing a systematic analysis that corruption causes unemployment, we have to keep in mind the following two crucial factors. First, corruption will cause unemployment not for general labour but for a specific type of labour and that is highly educated. Second, corruption will cause unemployment not through demand shock but through supply shock which is not temporary but permanent. In what follows, we will show how permanent supply shock caused by corruption generates unemployment for highly educated labour.
CORRUPTION AND SUPPLY SHOCK: ENTERPRENEURIAL SLACKNESS: Noted economist Lawrence Summers to exemplify the role of entrepreneurship and its impact on the US economy once said, "This is the only country (the USA) in the world where you can raise hundred million dollars before you buy your first suit and tie". The role of entrepreneurship has been recognised by economists. Joseph Schumpeter is one the economists who was first to recognise the critical role of entrepreneurship and its crucial role in creating cycle ups and downs. So, entrepreneurship has important macroeconomic implications, especially for unemployment. Higher level of entrepreneurial activities means smaller level of unemployment for an economy, other things remaining same. Summers' statement implies that the USA is recognised as a fertile ground for entrepreneurship and that it boasts of higher level of entrepreneurial activity.
One popular example that can support Summers' statement that you can raise hundred million dollars before you buy your first suit and tie is facebook. But the real fact is that the fertile ground is not descended from the heaven to the earth. Rather the ground was made and is being fostered through entrepreneurship-friendly environment. Let's take an example. Imagine that someone in Dhaka, who just graduated from one university, has discovered a new method to make tea. He thinks that if he can establish a business opening a shop, he will make good profit since the product will have good demand according to his assessment. Now, to bring his innovation to market he has to find a place to build the shop. Then, he needs to procure all the necessary things to get his start. But the real problem he will face if he wants to open a tea shop in Dhaka is the amount of money he has to spend to placate unwanted political goons. Moreover, he has to go through the city corporation rules and regulations making his matter worse since he has to cajole them with bribe to get all the necessary permissions and documents. Now, if the same person were to open the same shop in the USA, he would need to gather the required sums and he can start his business even in a week if he wants.
Let us compare the ease of starting business in two different countries and what kind of factors motivate people to start their own small business in the USA even after graduating from university. Some people will say people in the USA are different because they have strong entrepreneurial drive. This statement is grossly wrong. There are thousands of examples of entrepreneurs who are from the same country we are from but are doing their own business and prefer establishing businesses to working under some other companies for fixed salary.
In fact there is hardly any special about the people in the USA to claim that they are born entrepreneurs. Rather a fertile ground has been made and is being fostered through transparent processes and equality of living principles that ultimately give incentives to people to do something and to innovate something since once a fruitful idea is generated, its realisation is just a matter of time free from institutional and governance inefficiencies. Over the years, high level of corruption and unethical rent-seeking attitude of our political leaders have depressed the drive of entrepreneurship in our country. Today, a university graduate can't imagine setting up a business with a small capital because he has to spend half of his budgeted capital on political goons and corrupt officials in several government offices. Some people just sit idle and do nothing even if they have some idea that is enough to set up a small business of their dream. The real impediment for them is the amount of money they have to spend to cajole and satisfy political and bureaucratic rogues. They often find it hard to finance that amount of money and their dream gets shattered. A lot of university graduates would have engaged themselves in setting small business had they found the environment for setting business favourable and friendly.
Another fact that deserves notice is that drive to set up small businesses is much higher among graduates from low-ranked universities. This is counter-intuitive at first sight. The reason is quite obvious. Given the relation between quality of education and job prospect, the graduates from lower grade universities form a very early assessment what their job prospects would be. Their guess of getting low-quality jobs drive them to look for some business prospects.
For example, a business graduate from Jaganath University will be more driven to set up a small business if he finds the suitable environment for setting up businesses than a business graduate from Dhaka University. But as soon as they encounter harsh reality of setting businesses in our country, they immediately postpone the idea of having any business at all. Then, even if the graduate from Jaganath University fails to get any job immediately, he will hardly do any business or think about it. He would spend his valuable energy and time hankering after jobs in some companies until he succeeds to get one. This kind of job-hunt overcrowds the market and creates mismatch between supply and demand generating higher number of people running after smaller number of jobs. In the end, the result is unemployment.
UNEMPLOYMENT AND CORRUPTION:
Now we can clearly see how corruption creates unemployment problem.  The fact is that corruption depresses entrepreneurial thrusts and activities in a country. The dampened growth of entrepreneurial activities creates a permanent supply shock in the economy and that shock generates unemployment. Since common observations say that entrepreneurial activities are mostly fostered by educated labour, corruption will cause higher level of unemployment for educated labour. This is what we are observing in our country at present. The higher level of unemployment among educated labour is the outcome of depressed entrepreneurial activities. The depression is caused by corruption. This observation refutes  the conventional wisdom that the American people are born entrepreneurial magnets. We can spur a higher growth of entrepreneurial activities in our country if we can curb corruption and dominance of political goons who are the real culprits behind the depressed entrepreneurship in our country.
Therefore, the link is as follows: Corruption depresses entrepreneurial activities and the growth of small businesses. The slackness in entrepreneurial activities and dampened growth of small business generates a permanent supply shock for the country in terms of creating huge gap between actual and potential output. The large gap between actual and potential output creates the problem of unemployment. In this way, corruption generates the problem of unemployment. But the unemployment is not general unemployment but segmented one. A specific group of people - highly educated labour or university graduates - is severely hit by corruption. In other words, corruption creates higher unemployment problem for educated labour. The recent statistics strongly support our analysis.
CURRENT RATE OF UNEMPLOYMENT: Findings of a study by the Bangladesh Institute Development Studies (BIDS) is that 10.31 per cent of post-graduates are currently unemployed. But the figure is very low - almost 2.82 per cent - for people with no formal education. Some have has tried to reconcile this kind of findings with mismatch between supply and demand for jobs at a given level of wages. The explanation is correct and the mismatch is there.
But the recommendation that has come out of the analysis of statistical data is quite unsatisfactory. The recommendation is that skilled human capital should be built while giving priority to technical and vocational education. This doesn't mean that total number of unemployed post-graduates could have been accommodated by the job market if they had come from the vocational and technical backgrounds. The question that must be answered in this case is the following: What per cent of total employment should be generated through entrepreneurial activities and the establishment of small business? This question has to be answered to give any recommendation for reducing the total number of unemployed post-graduates. In fact, in our country, it can be convincingly argued that a large fraction of total post-graduate unemployment is contributed by the slackness in entrepreneurial activities and dampened growth of small businesses. If the level of corruption is reduced and business and entrepreneurship-friendly environment is created, we hope to see gradual decline in the post-graduate unemployment. Therefore, to reduce the total number of post-graduate unemployed, we need to reduce the level of corruption in our society. The gradual decline in the level of corruption will encourage more entrepreneurial activities and the growth of small businesses which will eventually absorb the current reserved army of post-graduates.
The contributor  writes from the University of Denver, USA.
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