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.