Policies to Reduce Unemployment

Policies to Reduce Unemployment

• When deciding on policies to reduce unemployment, the choice will depend on:
  • The cause of unemployment
  • The rate and duration of unemployment
  • The state of other macroeconomic objectives

Demand-Side Policies

• If the economy is operating below its productive capacity, unemployment may be reduced by increasing AD
  • This can be achieved by expansionary fiscal or monetary policy
    • Fiscal – Increasing spending or cut taxes
    • Monetary – Increasing money supply or lower interest rates
  • These expansionary policies may have undesirable side-effects
    • If the economy is close to operating at full capacity, a rise in AD could cause the price level to increase
    • A higher level of spending may also increase the deficit of the current account of the balance of payments, as UK residents will buy more imported products.

Supply-Side Policies

• Unemployment can also exist where there is no shortage of AD if there are supply side problems. And this is likely to be the case where:
  • People are between jobs
    • This can be fixed by improving better quality of information about available jobs
  • People are lacking the appropriate skills
    • Increase the quality and availability of training and education could fix this
  • Geographical or occupational immobility
  • Family circumstances hinder the person’s ability to find work
    • Greater provision of benefits like low-cost child care could fix this
  • People are lacking the incentive to move off benefits to employment
    • Widening the gap between income received when working and when on benefits could change this
  • It is likely, however, at any given time, that the presence of employment is both a demand-side and a supply-side problem, and needs both measures to correct it.