Another possible cause of unemployment is having a large majority of the population, being unskilled workers. In extract D, it tells us that a problem with Britain’s most deprived areas is not necessarily the lack of jobs, but people not being skilled enough to take advantage of nearby labour markets. This is caused by a lack of education and qualifications, if people don’t have these, then they usually are unable to get the job. A way the government could over come this problem and get more people employed is by offering them training courses. Lack of education is a very common cause of unemployment.
Another possible cause of unemployment is structural changes in the economy. We can see in extract C that reductions in unemployment, require a cut in structural unemployment, which requires the use of supply side policies to make the labour market work effectively. These measures can be used to increase economic incentives and the quality of the labour services offered to the unemployed. By giving them incentives, they will want to get into work.
- Evaluate the polices the government should adopt if it wishes to achieve a low level of unemployment.
The unemployment described in the sources, is cyclical unemployment. This means that there is insufficient demand in the economy for all the workers who wish to work at current wage rates to obtain a job. This could happen in a down turn or a recession (see diagram 2). There are several policies the government could enforce to tackle the problem of unemployment. Firstly, they could cut interest rates in order to boost the AD; this would be using the monetary policy. In cutting interest rates, it would boost consumption and investments and in theory should move the AD curve outwards and to the right. Thereby, hopefully increasing the availability of jobs. The government aims to set interest rates with the objective of keeping inflation close to the target of 2%. The monetary policy can be enforced relatively quickly; however, it can take time for policies to influence aggregate demand. It is estimated to take 18 months before a change in interest rates will affect consumption and investment. So this policy seems to be more of a quick short term effect rather than a sustainable one.
Another possible policy is to use the fiscal policy and increase government spending. The government usually spends money on education, health, defence and social security. The government can raise the AD by increasing spending. For example spending on computers in schools would increase AD. The higher spending will have a multiplier effect. Government spending on education, may shift the LRAS to the right (see diagram 3) They could spend more money employing people and creating jobs for them to reduce unemployment. This is linked into the Keynesian view that low wage rates should result in higher employment levels, to create a job for someone should be ‘better than them sitting home on benefits.’ Employers have low demand for workers, so the government could offer those incentives to employ people, therefore creating more jobs and reducing unemployment. However changes in government spending, take a long time to have an effect on the economy. But again, in the long run it could be a very beneficial policy.
Cutting tax could also be a possible policy used to reduce unemployment. There are two categories of tax, indirect and direct tax and progressive, proportional and regressive tax. The government can raise the AD by reducing tax. Cuts in tax will increase people’s income and raise consumption; this again will have a multiplier effect. (See Diagram 4) Changes in taxes can affect the AS, a cut in benefits, could alter incentives that may changes the supply of labour. Reducing tax will have the effect that people will feel wealthier and will have more of an incentive to go out and buy products. This will create more job opportunities in businesses. Lowering taxes will also give people more of a reason to invest. However it is difficult to estimate the effects that changes in tax will have on the economy and it’s difficult to predict how long it would take for the changes to happen.
Another possible policy to enforce is a supply-side policy. They aim to increase AS by raising market efficiency and in turn increase AS. The government could improve education and training, which should raise the productivity of labour. If people are more skilled, they will be available for new jobs in different sectors. In doing this, it should hopefully shift the long run aggregate supply to the right. (See diagram 3) A reduction in unemployment benefits, would give people an incentive to seek more work and accept lower wage rates, thereby reducing unemployment levels, however some argue that cutting benefits would reduce AD and output. Supply side policies are selective and are targeted at particular markets to raise economic efficiency. Many agree that if these policies achieve their goal, it will make it easier for the government to then achieve its aims of reducing unemployment. Increasing AS allows AD to rise over time without the risk of inflation. However, there is the problem of not knowing how workers would respond to cuts in wages or benefits. Also some of these policies would take a long time to have an effect on the economy.
From my point of view, I believe that the most effective policy to enforce would be to cut interest rates and taxes. It would give people more incentive to spend in shops and on investments. This would then create more jobs, which would then reduce the level of unemployment. I feel it would be most effective and efficient.