Policies a
Government uses to
reduce
Unemployment
Unemployment is costly to an
Economy
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Reduced incomes to those unemployed and lower
living standards
Reduced non material living standards and reduced
quality of life, health problems arise.
Reduced government revenue from taxes,
especially income tax.
Increased expenditure by the government on
welfare payments such as unemployment benefits
Loss of productive skills of those unemployed
Factors of production being underutilised in the
economy.
Types of Unemployment
There are two main categories of Unemployment
 Cyclical unemployment
- Caused by downturns in the business cycle
Natural unemployment:
- Caused by microeconomic problems in certain
sectors of the economy (the supply of factors of
production)
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Reducing Cyclical Unemployment
Cyclical Unemployment
To counter cyclical unemployment the government
needs to boost Aggregate Demand in the economy. It
can do this two ways:
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Budgetary policy – the government can increase
spending and reduce taxes to boost the number of
jobs being created in an economy.
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The government can spend money to employ more
public servants (G1) or spend money on
infrastructure projects to boost jobs (G2)
Reducing Cyclical Unemployment
Cyclical Unemployment
Monetary policy – the government can reduce
interest rates making it cheaper for households and
business to borrow money.
 The borrowing of money can be spent on
increasing aggregate demand (households buying
cars, TV.s , going on holiday) and (business
spending to expand their businesses). The net result
will hopefully be more jobs
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Reducing Natural Unemployment
Natural Unemployment
To counter Natural unemployment the government needs
to target problems in the economy that cause structural,
frictional, seasonal and hard core unemployment
Policies include:
- increase incentives to work
- increase education and training of people
- cut costs in the economy that make it expensive for
business to hire people (e.g. tariffs, taxes)
- Promote a more flexible labour market (less
restrictions)
- Tighten welfare to reduce incentive to be unemployed.
Reducing Natural Unemployment
These policies are designed to improve aggregate
supply in the economy
Tax Reform – lower taxes (including Tariffs) give
more incentives for labour to work harder and
businesses to invest in capital
Labour Market Deregulation – removing
restrictions on labour being hired allows greater
competition in the labour market. (Eg.working
weekends)
Reducing Natural Unemployment
Education – A better educated labour force is more
skilled and more productive and more able to
find work.
Infrastructure – better roads and rail allows goods
to be transported quickly cutting costs of
distribution to business and making the economy
more efficient.
Increased competition – removing monopolies and
oligopolies increases competition and
employment in those sectors of industry.