Policies to Reduce Unemployment (CIE IGCSE Economics)

• Expansionary fiscal policy & 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

• 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 & 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 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 & unemployment may fall
     

Examples of Supply-side Policies Which Are Likely To Reduce Unemployment

• 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 & structural unemployment
• It does not help deal with unemployment caused by demand side issues e.g. a recession

• 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 & 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 & increased unemployment in many related industries
      
• A deeper evaluation of protectionism is available in Sub-topic 6.3.2