Policies to Reduce Unemployment

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    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.

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