Policies to reduce unemployment

• 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