Policies for reducing unemployment

14 June 2019 by Tejvan Pettinger

There are two main strategies for reducing unemployment –
Demand side policies to reduce demand-deficient unemployment (unemployment caused by recession)
Supply side policies to reduce structural unemployment / (the natural rate of unemployment)
A quick list of policies to reduce unemployment
Monetary policy – cutting interest rates to boost aggregate demand (AD)
Fiscal policy – cutting taxes to boost AD.
Education and training to help reduce structural unemployment.
Geographical subsidies to encourage firms to invest in depressed areas.
Lower minimum wage to reduce real wage unemployment.
More flexible labour markets, to make it easier to hire and fire workers.

Demand side policies

Demand side policies are critical when there is a recession and rise in cyclical unemployment. (e.g. after 1991/92
recession and after 2008 recession)
1. Fiscal Policy
Fiscal policy can decrease unemployment by helping to increase aggregate demand and the rate of economic growth.
The government will need to pursue expansionary fiscal policy; this involves cutting taxes and increasing government
spending. Lower taxes increase disposable income (e.g. VAT cut to 15% in 2008) and therefore help to increase
consumption, leading to higher aggregate demand (AD).
With an increase in AD, there will be an increase in Real GDP (as long as there is spare capacity in the economy.) If firms
produce more, there will be an increase in demand for workers and therefore lower demand-deficient unemployment.
Also, with higher aggregate demand and strong economic growth, fewer firms will go bankrupt meaning fewer job losses.
Keynes was an active advocate of expansionary fiscal policy during a prolonged recession. He argues that in a recession,
resources (both capital and labour) are idle. Therefore the government should intervene and create additional demand
to reduce unemployment.
Impact of Higher AD on Economy
This shows an increase in AD causing higher real GDP. The increase in output leads to firms needing more workers.
However,
It depends on other components of AD. e.g. if confidence is low, cutting taxes may not increase consumer spending
because people prefer to save. Also, people may not spend tax cuts, if they will soon be reversed.
Fiscal policy may have time lags. E.g., a decision to increase government spending may take a long time to affect
aggregated demand (AD).
If the economy is close to full capacity, an increase in AD will only cause inflation. Expansionary fiscal policy will only
reduce unemployment if there is an output gap.
Expansionary fiscal policy will require higher government borrowing – this may not be possible for countries with high
levels of debt, and rising bond yields.
In the long run, expansionary fiscal policy may cause crowding out, i.e. the government increase spending but because
they borrow from the private sector, they have less to spend, and therefore AD doesn’t increase. However, Keynesians
argue crowding out will not occur in a liquidity trap.
2. Monetary policy
Monetary policy would involve cutting interest rates. Lower rates decrease the cost of borrowing and encourage people
to spend and invest. This increases AD and should also help to increase GDP and reduce demand deficient
unemployment.
Also, lower interest rates will reduce exchange rate and make exports more competitive.
In some cases, lower interest rates may be ineffective in boosting demand. In this case, Central Banks may resort to
Quantitative easing. This is an attempt to increase the money supply and boost aggregate demand. See: Quantitative
easing.
Evaluation
Similar problems to fiscal policy. e.g. it depends on other components of AD.
Lower interest rates may not help boost spending if banks are still reluctant to lend.
Demand side policies can contribute to reducing demand deficient unemployment e.g. in a recession. However, they
cannot reduce supply-side unemployment. Therefore, their effectiveness depends on the type of unemployment that
occurs.
Supply side policies for reducing unemployment
 Non-cyclical rate of
unemployment is the unemployment due to supply-side factors – structural, frictional, classical real-wage.
Supply side policies deal with more micro-economic issues. They don’t aim to boost overall aggregate demand but seek
to overcome imperfections in the labour market and reduce unemployment caused by supply side factors. Supply side
unemployment includes:
Frictional
Structural
Classical (real wage)
Policies to reduce supply-side unemployment
1. Education and training. The aim is to give the long-term unemployed new skills which enable them to find jobs in
developing industries, e.g. retrain unemployed steel workers to have basic I.T. skills which help them find work in the
service sector. – However, despite providing education and training schemes, the unemployed may be unable or
unwilling to learn new skills. At best it will take several years to reduce unemployment.
2. Reduce the power of trades unions. If unions can bargain for wages above the market clearing level, they will cause
real wage unemployment. In this case reducing the influence of trades unions (or reducing Minimum wages) will help
solve this real wage unemployment.
3. Employment subsidies. Firms could be given tax breaks or subsidies for taking on long-term unemployed. This helps
give them new confidence and on the job training. However, it will be quite expensive, and it may encourage firms to just
replace current workers with the long-term unemployment to benefit from the tax breaks.
4. Improve labour market flexibility. It is argued that higher structural rates of unemployment in Europe is due to
restrictive labour markets which discourage firms from employing workers in the first place. For example, abolishing
maximum working weeks and making it easier to hire and fire workers may encourage more job creation. However,
increased labour market flexibility could cause a rise in temporary employment and greater job insecurity.
5. Stricter benefit requirements. Governments could take a more pro-active role in making the unemployed accept a
job or risk losing benefits. After a certain period, the government could guarantee a public sector job (e.g. cleaning
streets). This could significantly reduce unemployment. However, it may mean the government end up employing
thousands of people in unproductive tasks which is very expensive. Also, if you make it difficult to claim benefits, you
may reduce the claimant count, but not the International Labour force survey. See: measures of unemployment
6. Improved geographical mobility. Often unemployed is more concentrated in certain regions. To overcome this
geographical unemployment, the government could give tax breaks to firms who set up in depressed areas. Alternatively,
they can provide financial assistance to unemployed workers who move to areas with high employment. (e.g. help with
renting in London)
7. Maximum working week. It has been suggested a maximum working week of (for example 35 hours) would lead to
firms needing to hire more workers and reduce unemployment.
However, a maximum working week may increase a firms costs and therefore they are not willing to hire more. Also,
there is no certainty a firm will respond to a cut in hours by employing more – they may try to increase productivity.
Those with the wrong skills will still face the same problem.

Policies to Reduce Unemployment

A-level Economics
In order for unemployment to be reduced, we first need to identify the different kinds of unemployment to apply the
correct policy.
We can use Demand-Side policies to reduce cyclical unemployment
Cyclical Unemployment: This type of unemployment occurs when there is demand-deficiency. That means when AD is
lower than AS. So, in a recession there will be a large amount of cyclical unemployment.
The whole problem of cyclical unemployment is due to a lack of demand, so the government must employ policies that are
designed to increase the levels of demand/spending.
WHAT POLICIES COULD THE GOVERNMENT USE?
Reflationary fiscal policies (expansionary) – increase welfare payments, increasing government spending, lowering taxes
are all examples.
What policies could the Bank of England (Central Bank) use?
Expansionary monetary policy – lowering interest rates, increasing the money supply (quantitative easing in emergency
cases)
HOWEVER, WHAT ARE THE PROBLEMS?
There could be a lack of information – e.g. what is the size of the negative output gap? How much more spending is
required?
If demand-side policy is too severe, it can lead to an overshoot – this will mean demand ends up outweighing supply an this
will lead to demand-pull inflation (which is an unintended consequence)
Also, the size of the multiplier needs to be taken into account. A high multiplier will have greater than anticipated effects
when there is an increase in government spending – this could lead to inflation. However, a low multiplier might lead to
weaker than expected increases in demand.
Also, we need into account time lags. It can take a long time for the effects to be felt throughout the economy. Time lags
that aren’t accounted for can lead to governments spending too much.
E.g. a policy may take a couple of years to really be felt throughout the economy. If the government doesn’t wait to see these
effects, they could employ even more policies when they are not needed.
POLICIES TO REDUCE THE NATURAL RATE OF UNEMPLOYMENT
(NRU)
To reduce the NRU, we need:
Supply-side policies to make the labour market more flexible, and to reduce frictional and structural unemployment.
POLICIES TO INCREASE FLEXIBILITY:
1. Labour mobility – this refers to the ability of labour to switch jobs easily. In order to change jobs, people need
transferable skills. Large and diverse skill sets held by workers will help improve this (occupational mobility).
We can also improve geographical mobility (improving transport networks). This will help workers get to work more easily
and to accept more jobs than before.
Policies could involve increasing the amount of training schemes, increasing the levels of education, improving the
transport networks.
2. Wage flexibility – wage flexibility is when wages can change according to the state of the labour market. They can
respond to the forces of supply and demand. In a recession, just because demand has fallen for goods and services, it doesn’t
mean that workers are paid less. Their wages remain the same, and this is why firms often make people redundant rather than
pay them lower wages. People’s wages are protected by employment contracts.
Flexible wages could lead to workers not being laid off in recessions.
Wages can be made more flexible by limiting trade union power. Also, the National Minimum Wage could also be
scrapped.
3. Flexibility of working arrangements – 0-hour contracts and part-time contracts can help solve this problem. Firms
want to hire people when the need is there (period of high demand). If workers are protected by long-term, permanent
contracts, then it will mean that firm hire less people.
Policies could involve passing laws that make it easier to hire and fire workers e.g. short-term or 0-hour contracts.
POLICIES TO REDUCE FRICTIONAL UNEMPLOYMENT:
1. Reduce unemployment benefits – this will help reduce the time it takes for people to get jobs when they’ve just
become unemployed.
2. Cutting income tax – it will increase the incentive of workers to find jobs or work longer hours because more of their
incomes are retained (more disposable income)
3. Improving information about available jobs – workers do not like to just find any job. Many people are looking for
a job that is the right fit. However, to get into these jobs takes many hours/days of searching and applying. Improvements in
information can help match people with ideal jobs more quickly and easily. This will help reduce frictional unemployment.
POLICIES TO REDUCE STRUCTURAL UNEMPLOYMENT
1. Investing in training schemes and education – to get more people trained with the skill sets they need to find and be
applicable for jobs. They can also try to encourage firms to provide more training .
2. Help reduce geographical mobility – building affordable houses in areas where jobs are e.g. London. Another option
is giving workers subsidies to move to different areas. However, this is difficult because people have ties to their friends and
family. Therefore, these incentives are often not responded to.
3. Governments can also target high unemployment areas – they could subsidise firms in those areas and they can
also provide training schemes in those areas specifically.

Government policies are available that can and should be used to ensure low unemployment
Introduction
At the present time, ideal for the most people is to live and work within an economic structure which may provide to them the
prospect of steady employment, fairly steady prices and a high quality standard of living. According to data from the year 2008
during the worldwide economic recession, the International Labor Office declared that global unemployment extended more
than 200 million people, 7 percent of the global workforce was looking for the job, which reached the highest level on record. It
is usually recognized that to achieve low levels of unemployment most governments concerning about using the policy
instruments to restructure. However, the types of policies are depending on what type of unemployment they address.
Body
As according to Downs (1957) “economics and politics must be merged into a unified theory of social action.” (P. 280). There are
two main political for reducing the unemployment, which is demand side policies and supply side policies. Demand side policies
aim to reduce the cyclical unemployment, which is caused by the recession. On the other side, the supply side policies are used
to reduce frictional and structural unemployment, which are due to imperfections in the labor market.
Demand side policies
Related to the demand side policies which mainly deal with cyclical unemployment. The term cyclical unemployment sometimes
also known as Keynesian unemployment, generally occurs during the business depression phase when investment and
consumption begin to drop off and the economy is incapable to create the equivalent number of jobs as occurred at the
preceding cyclical peak. As the results of businesses not having sufficient needs for worker to employ entirely those who are
searching for work. The deficiency of worker demand comes from an absence of outlay and consumption around the whole
economy. When business cycles are at their peak, total economic output is being maximized, therefore cyclical unemployment
will be low. When economic output decreases, the business cycle will drop down and cyclical unemployment will rise.
Fiscal policy
Increasing the aggregate demand and economic growth rate is the efficient way to lead unemployment decrease. The
government will need to pursue an expansionary fiscal policy, which may include decreasing the taxes and increasing
government expenditures. The Government can increase its own expenditure level. This “fiscal pump-priming” straightly
increases aggregate demand and can make a significant influence on national income equilibrium. The government might
increase current expenditure (for example aggrandizing the payment in the part of education and the health care service) or
multiply expenses on capital schemes which improve the stock of capital (such as expenditure on new infrastructures, new
infirmaries or other major public service projects). Continued economic growing offers a stage for more jobs to be found in the
economy. Besides, a declining in taxation may result of increases buyers’ disposable income and should enhance household
spending. The effect may be better if taxes are decreased for individuals on lesser than average incomes. These tax-payers are
probable to spend a larger percentage of their disposable income. In short, lesser taxes increase disposal income and therefore
assistance to increase consumption, giving rise to higher aggregate demand. As aggregate demand increased, Real GDP will
also increase. If the company needs to produce more, there will be an escalation in demand for employees and therefore lower
the unemployment.

Monetary policy
With the demand side policies government would diminution interest rates of monetary policy. A reduction of monetary policy
through lower interest rates stimulates the demand for credit, decreases saving and increases consumers’ actual ‘effective’
disposable incomes; all of which will improve total consumption and demand. During the marginal cost of investment drop
down, the low interest rate may also inspire firms to invest. This increases aggregate demand and should benefit to GDP growth
and reduce demand deficient unemployment. However, in some cases, as lower interest rate may be useless in improving
demand. In this situation, Central Bank may option to quantitative easing. This is an attempt to increase the money supply and
increase aggregate demand.
Supply side policies
On the other hand, from the supply side policies for reducing unemployment, which don’t aim to enhance total aggregate
demand, but pursue to overcome imperfections in the labor market and diminish unemployment. Supply side unemployment
includes both frictional and structural unemployment. Firstly, with frictional unemployment is the period during potential
workers are searching for or transitioning from one occupation to another. There are vacancies available, but the
unemployment worker and the potential employer are not matched yet. Frictional unemployment exists because the labor
market is not perfect in matching the vast number of individual suppliers of labor service with the large number of employees
who want those services. If the search takes too long for someone is out of work then there is less likely job offers develop. The
reason for that situation is that the skills and experience have long time lack of use, and also more potential employers
sometimes in contradiction of the person who has been unemployed. Moreover, the level of frictional unemployment will
depend upon the number of workers changing their job regard to some specific reasons, the number of workers who laid off by
the employers, and the average duration of job search. Since each of three factors can contrast with the level of aggregate
demand, frictional unemployment will be dependent on the level of aggregate demand. Secondly, related to structural
unemployment is because of the number of people wanting jobs are more than available jobs vacancies. Unemployed workers
may deficiency in the skills required for the jobs, or they may not live in the part of the country or world which the jobs are
offered. By comparing with the frictional unemployment, structural unemployment is more central, due to the point that
workers are not perfectly suitable for the job. In addition, structural unemployment arises may most cause by changes in
consumer expectation, production technical skills required, and position of industry, etc., or changes in the characteristics of the
labor supply.
In this situation, governments can sanction policies to attempt to reduce frictional and structural unemployment. In order to
reduce the frictional unemployment, includes offering guidance and facts for job-seekers and providing unblemished and
transparent information on available jobs and workers. For instant, the employment of the Job Seeker’s Allowance in 1996
confirms that workers are enthusiastically looking for work as the payment of benefit is reliant on them demonstrating this at
periodical interviews. This can be in the form of free career counseling and job boards or job fairs. The government can offer
convenient facilities to intensification availability and flexibility. For example, providing daycare may allow part-time or non-
workers to conversion into permanent jobs, and public transportation may extend the number of jobs accessible to somebody
without a car. The government may also fund publicity campaigns or other programs to combat bias against certain types of
workers, jobs, or locations. Furthermore, public policy can disentangle structural unemployment through job training, education
and other motivation strategies to equip workers with the skills firms demand. For example remembrance unemployed steel
workers to have basic I.T. skills which may support them catch work in the service sector, or a worker who was trained in an
outdated field, such as a textile worker who lost his job when spinning was mechanized, may benefit from unrestricted
retraining in another field with strong demand for labor.
In another word, everything may have double-side. Issues of unemployment numbers and associated problems are
frequently raised when discussing the economic policy performance of a government. The clearest trouble for the government
policy is that the economic objectives “trade off” against each other. For example, policy instruments that governments want to
reach the objective of lesser inflation often inflict a result of higher unemployment. Limitation the money supply may falling the
value of expenditure, and increase interest rates, resulting in many companies going to insolvent, with a lot of people lost their
jobs. Controlling governing outlay as part of monetary policy can also increase unemployment in the public segment.
Conclusion
Governments would have no macroeconomic difficulties if market forces in the economy spontaneously directed to full
employment, with unwavering prices and a fast economic development. Nowadays, the world economy is still depressing from
the stresses of the longest crisis, over 100 million people are unavailable of work in the G20 countries, with unemployment at
generally high levels in several of them. Government policy always look for to diminish unemployment by providing
information, training, facilities and other programs to impact the unemployment. In the future, to deal with the unemployment
problem, governments still face a very long and difficult way to go.

V. POLICIES TO REDUCE UNEMPLOYMENT

A. Reducing Cyclical Unemployment
1. Most economists believe that an increase in cyclical unemployment is caused by a decrease in aggregate
demand.
2. If wages and other input prices are "sticky," the economy can experience relatively long periods of cyclical
unemployment and policies will be needed to reduce the unemployment.
3. Stabilization policies, government policies intended to maintain full employment and a reasonably stable price
level, can be used.
a. Expansionary fiscal and monetary policies can be used.
4. There is a tradeoff between reducing unemployment and increasing the price level.
a. If the economy is at full employment, expansionary policies will simply increase the price level and leave output
unchanged.
5. Despite the use of stabilization policies, we still observe cyclical movements in the unemployment rate and price
level.
a. These fluctuations occur because it is difficult to know how much to change variables such as government
spending when using stabilization policy and because it is difficult to use stabilization policy in a timely manner.
B. Reducing Structural Unemployment
1. Policy suggestions to reduce structural unemployment include providing government training programs to the
structurally unemployed, paying subsidies to firms that provide training to displaced workers, helping the
structurally unemployed to relocate to areas where jobs exist, and inducing prospective workers to continue or
resume their education.
C. Reducing Frictional Unemployment
1. Policy suggestions to reduce frictional unemployment include establishing a computerized national job bank that
would provide job seekers and prospective employers with better information and implementing apprenticeship
programs similar to those used in Austria and Germany.