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Economics A Level
Macro - Paper 2
Policies to reduce unemployment
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Created by
Toby Landes (GRK7)
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Cards (16)
Macro objective for unemployment
Low unemployment or more precisely full employment
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Unemployment is greater than desired
Need to bring it down via macro policies
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Cyclical unemployment
Occurs in a recession when aggregate demand is very low
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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)
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Expansionary demand-side policies
Increase aggregate demand, leading to economic growth and more employment
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Potential issues with using expansionary demand-side policies:
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Real wage unemployment
Wages in the labour market forced above equilibrium, creating excess supply of labour
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Reducing real wage unemployment
Policies to bring down wage rate towards equilibrium (e.g. reduce minimum wages, reduce trade union strength)
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Potential issues with reducing real wage unemployment:
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Structural unemployment
Unemployment due to immobility of labour (occupational and geographical)
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Frictional unemployment
Search unemployment as workers transition between jobs
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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)
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Potential issues with supply-side policies:
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Difficult to isolate which type of unemployment is most prevalent
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Frictional unemployment can be healthy, but structural unemployment needs to be addressed
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Target is full employment, so policies depend on whether unemployment is at or above the natural rate
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