Policies to reduce unemployment

    Cards (16)

    • Macro objective for unemployment
      Low unemployment or more precisely full employment
    • Unemployment is greater than desired
      Need to bring it down via macro policies
    • Cyclical unemployment
      Occurs in a recession when aggregate demand is very low
    • Reducing cyclical unemployment
      1. Use expansionary demand-side policies
      2. Expansionary fiscal policy (increase government spending, reduce taxes)
      3. Expansionary monetary policy (reduce interest rates)
    • Expansionary demand-side policies
      Increase aggregate demand, leading to economic growth and more employment
    • Potential issues with using expansionary demand-side policies:
    • Real wage unemployment
      Wages in the labour market forced above equilibrium, creating excess supply of labour
    • Reducing real wage unemployment
      Policies to bring down wage rate towards equilibrium (e.g. reduce minimum wages, reduce trade union strength)
    • Potential issues with reducing real wage unemployment:
    • Structural unemployment
      Unemployment due to immobility of labour (occupational and geographical)
    • Frictional unemployment
      Search unemployment as workers transition between jobs
    • Reducing structural and frictional unemployment
      1. Use targeted supply-side policies
      2. Interventionist policies (e.g. education/training, transport infrastructure, housing)
      3. Market-based policies (e.g. reduce benefits, deregulate hiring/firing)
    • Potential issues with supply-side policies:
    • Difficult to isolate which type of unemployment is most prevalent
    • Frictional unemployment can be healthy, but structural unemployment needs to be addressed
    • Target is full employment, so policies depend on whether unemployment is at or above the natural rate