Measures to reduce unemployment

Cyclical unemployment

Use expansionary demand side policies to increase AD in the economy i.e. fiscal and monetary policy

Structural unemployment

  • Market Oriented measures such as letting the wages fall in depressed areas, lowering unemployment benefits, reducing workers’ job security, lowering income tax.
  • Interventionist measures include setting up training facilities for workers to upgrade their skills, encourage geographical mobility, providing job information, offering incentives to firms that hire in depressed areas.

Frictional & Seasonal unemployment

  • Measures include reducing the time that a worker spends in between jobs and improving information flows between workers.
  • Market Oriented measures such as lowering unemployment benefits, lowering income tax.
  • Interventionist measures include setting up jobs centres, employment agencies.

Which are the most effective policies?

It depends upon the type of unemployment involved.

However, the types of equilibrium unemployment (frictional, structural and seasonal) may ONLY be cured by supply-side policies.

Demand-deficient unemployment may be cured by expansionary demand-side policies.

The use of demand-side policies may have bad effects elsewhere in the economy. For example, if interest rates are lowered, this may lead to inflation and a fall in the external value of the currency (the exchange rate). Furthermore, there is no guarantee that expansionary monetary policy will be effective in raising AD. If consumer and business expectations about the future are pessimistic, then lower interest rates may not necessarily lead to increased AD.