Readers Question: how we can reduce the unemployment (with implication ) in short run and long run and try to give some lively examples except of uk
The Unemployment rate in the UK is currently quite low about 4.5%. Therefore, it is difficult for the government to significantly reduce this. A lot of the unemployment is frictional. Therefore let us think about reducing unemployment in Spain, where the unemployment rate is currently 8.7% (Dec 2007)
Spanish Unemployment has also risen in the last two months, due to fall in the construction industry.
Policies to Reduce Unemployment in Spain
1. Boost Aggregate Demand. The government could use reflationary fiscal policy to try and increase AD. For example, the government could cut taxes and increase Spending; this would increase AD and lead to higher growth. As growth increases firms would demand more workers.
- Could cause inflation. Growth in 2007 was 3.8%. This suggests a lot of the unemployment is supply side.
- Government debt in Spain is already very high. Therefore, in the long term expansionary fiscal policy would make the government debt worse, possibly contributing to crowding out and higher interest rates
2. Leave the Euro and Cut Interest Rates. Rather a radical suggestion, but, it has done the UK no harm to be outside the EURO. It gives the UK freedom to cut interest rates for what the economy needs rather than what is good for the EU area.
However, would cause inconvenience of exchange rate fluctuations and transaction costs. Lower interest rates aren’t guaranteed to solve unemployment either.
See also: The Role of AD in reducing unemployment
3. Supply side Policies.
There are many supply side policies the government could try and use. For example
Increased Labour market flexibility. – Easier to hire and fire workers. This may encourage firms to take on workers because there is less red tape and bureaucracy involved. However, it might require the EU to change its employment law. The Spanish government can only do so much
Education and Training. A lot of unemployment is focused amongst young people in inner cities. The government could try to reintegrate this group into the labour market through supply side polices such as spending on improving skills. They could also try similar things to the UK new deal, such as, giving better information and encouraging people to get a job or lose benefits.
However, takes time to have effect. There is no guarantee that spending money on education will actually improve the labour market.
Government Subsidies of Jobs.
This article suggests the highest rise in unemployment is due to the downturn in the real estate sector. Therefore, government could try to create jobs by paying for new houses to be built. But, is this a good idea to build houses, when demand is falling? It will be very expensive for the government.
See more on supply side policies