Policies to Reduce Unemployment (Cambridge (CIE) O Level Economics)
Revision Note
Demand-side Policies
Expansionary fiscal policy and expansionary monetary policy aim to increase total (aggregate) demand in an economy
The demand for labour is derived from the demand for goods/services
If total demand for goods/service increases there will be a higher demand for labour leading to lower unemployment
Total demand can be increased through any policy which increases one of the components of real gross domestic product (rGDP)
Examples of Demand-Side Policies Which Are Likely To Reduce Unemployment
Broad Policy Type | Specific Policy | Explanation |
|---|---|---|
Expansionary Fiscal Policy | Government decreases corporation tax | Firms pay less tax → firms have more profit → firms hire more workers → firms increase output → unemployment falls |
Expansionary Fiscal Policy | Government increases expenditure on national defence | Defence firms receive more orders from the government → they hire more workers to produce the output → unemployment falls |
Expansionary Fiscal Policy | Government decreases personal income tax | Households have more discretionary income → consumption increases → in order to produce the extra goods/services, firms hire more workers → unemployment falls |
Expansionary Monetary Policy | The Central Bank lowers interest rates | Household repayments on existing loans fall → Households have more discretionary income → consumption increases → in order to produce the extra goods/services, firms hire more workers → unemployment falls |
Expansionary Monetary Policy | The Central Bank increases the money supply through quantitative easing | Many firms receive money as the Central Bank buys back their bonds → they decide to use the extra money to invest in new equipment and technology → investment increases allowing the production of the more goods/services → firms hire more workers → unemployment falls |
Demand-side policies are very effective at dealing with unemployment caused by a fall in total (aggregate) demand
They are not effective at dealing with frictional and structural unemployment
One conflict caused by expansionary policy is that demand pull inflation is likely to occur
Expansionary monetary policy tends to increase inequality in the distribution of income as the poor are usually unable to benefit from it (banks do not necessarily lend to the poorest households)
Supply-side Policies
Supply-side policies aim to improve the quantity/quality of the factors of production thereby raising potential output
If output increases then firms will require more workers to produce that output and unemployment may fall
Examples of Supply-Side Policies Which Are Likely To Reduce Unemployment
Specific Supply-side Policy | Explanation |
|---|---|
The Government reduces trade union power | Trade union power weakens → firms lower wages → costs of production decrease → firms can produce more output with the same input → firms hire more workers as they are cheaper → unemployment falls |
The Government reduces regulation on the oil and banking industries | Regulations removed → costs of production decrease as firms no longer need to spend money meeting requirements → firms can produce more output with the same input → firms hire more workers as they are cheaper → unemployment falls |
The Government introduces new long term training subsidies for students of green technology | Cheaper to study green technology → more students develop their skills → supply of skilled workers in the industry grows → new firms launch → output increases and more workers are required → unemployment falls |
Supply-side policy tends to be long term e.g. breaking trade union power is a long term process, as is training
It is most effective in dealing with unemployment caused by frictional and structural unemployment
It does not help deal with unemployment caused by demand side issues e.g. a recession
Protectionist Policies
Protectionism involves the use of government policies that restrict international trade in order to protect domestic industries, including employment in domestic industries
Some firms are unable to compete with international firms and without protection, go out of business
Their workers become unemployed
To avoid this, governments help domestic firms to survive by subsidising them, or placing import tariffs on a range of products which raises the price of the goods/services provided by foreign competitors
Protectionist policies may well protect employment of some workers in the industry targeted, but create even higher unemployment in related industries
E.g. in 2016, The Trump Administration placed tariffs on all steel imports which protected around 1,600 jobs in the steel industry. However, the raised price of imported steel, which is used as a factor of production in many industries, reduced output and increased unemployment in many related industries
A deeper evaluation of protectionism is available in Sub-topic 6.3.2
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