4.7. Unemployment Policies

Question 1

Unemployment Policies

Answer 1

1) Reflationary (Expansionary) Fiscal Policy - cyclical
2) Reflationary (Expansionary) Monetary Policy - cyclical
3) Protectionism - cyclical
4) Supply-side Policy - structural, frictional, classical

Question 2

Reflationary (Expansionary) Fiscal Policy Meaning

Answer 2

Policy that involves a decrease in taxation / increase in government spending.
* Keynesian Concept

Question 3

Reflationary (Expansionary) Fiscal Policy Impact

Answer 3

• Decrease in taxation / increase in government spending.
• Increase in household disposable income
• Rise in consumption.
• Increase in aggregate demand (AD).
• Firms increase output.
• Fall in cyclical unemployment.

Question 4

Reflationary (Expansionary) Fiscal Policy Evaluation (limitations)

Answer 4

Monetarists are not in favour and think in the LR supply side policies need to be used.

• Depends on other factors affecting AD e.g. confidence, interest rates.
• Does not reduce supply-side unemployment (e.g. frictional, structural).
• Demand-pull inflation occurs as economy approaches full capacity.
• Tax cuts may be saved and not spent.
• Size of tax cuts e.g. small cut may not affect AD much.
• Time lag between tax cut and impact.
• Budget deficit / national debt rises.
• Crowding out effect (higher government borrowing increases interest rates which reduces private sector investment).

Question 5

Reflationary (Expansionary) Monetary Policy Meaning

Answer 5

Policy that involves decrease in interest rates / increase in money supply.

Question 6

Reflationary (Expansionary) Monetary Policy Impact

Answer 6

• Decrease in interest rates.
• Fall in saving (lower returns) and rise in borrowing (lower interest payments).
• Rise in household consumption and business investment.
• Also reduces the exchange rate which makes exports more competitive.
• Increase in aggregate demand (AD).
• Firms increase output.
• Fall in cyclical unemployment.

Question 7

Reflationary (Expansionary) Monetary Policy Evaluation (Limitations)

Answer 7

• Depends on other factors affecting AD e.g. confidence, tax rates.
• Does not reduce supply-side unemployment (e.g. frictional, structural).
• Demand-pull inflation occurs as economy approaches full capacity.
• Banks may not pass on the lower interest rates to borrowers or might be reluctant to lend.
• Size of interest rate cuts e.g. small cut may not affect AD much.
• Time lag between interest rate cut and impact.
• More borrowing will increase household debt.
• Weaker exchange rate will increase the price of imports.

Question 8

Protectionism Meaning

Answer 8

protect domestic industries from foreign competition through trade restrictions (e.g. tariffs, quotas, domestic subsidies, export subsidies).

Question 9

Protectionism Impact

Answer 9

• Encourages more spending on products made by domestic producers and less spending on foreign producers.
• Domestic producers increase output for the domestic market and foreign markets.
• Cyclical (demand-deficient) unemployment falls.
• Declining industries are more protected to ensure jobs are not lost.

Question 10

Protectionism Evaluation (Limitations)

Answer 10

• Other countries may retaliate with their own protectionist measures.
• Higher prices (domestic and imports) will reduce consumption and AD.
• Costs of production rise (due to higher import prices) which may result in job loss.
• Limited impact on supply-side unemployment.

Question 11

Supply-Side Policy Meaning

Answer 11

long-term policies aimed at increasing productivity / productive capacity.
* Supply-side policies aim to reduce supply-side unemployment / natural rate of unemployment. i.e. structural, frictional, regional etc.

Question 12

Supply-Side Policy Examples and Impacts

Answer 12

1) Education and training to improve skills (structural)
2) Provide more job information (frictional)
3) Reduce/abolish trade union or gov’t wages above equilibrium (classical)
4) Reduce geographical immobility e.g. financial assistance to unemployed workers to move to areas of employment (structural)
5) Improved flexibility of labour markets to make recruitment easier (frictional)
6) Stricter requirements for unemployment benefits (frictional)
7) Employment subsidies / tax breaks to encourage recruitment (frictional).

Question 13

Supply-Side Policy Evaluation (Limitations)

Answer 13

• Ineffective during a recession/downturn when cyclical unemployment is rising.
• Expensive/costly to implement
• Opportunity cost as there will be less spending in other areas of the economy.
• Impact is long-term so effects/success will not be known for a long time.
• No guarantee they it will work e.g. long-term unemployed may be unwilling to re-train.

Question 14

Evaluation of Unemployment Policies

Answer 14

• the correct policy depends on the cause of unemployment:
• consider the adverse side effects of the policies.

1) Demand-side unemployment (e.g. cyclical) requires demand-side policies (e.g. expansionary fiscal and monetary policies).
2) Supply-side unemployment (e.g. structural, frictional, regional, seasonal) requires supply-side policies (e.g. education, training, information, incentives).
3) It is likely that a combination of demand-side policies (fiscal and monetary) and supply-side policies will need to be used together.