Essay:. Evaluate the view that the main objective of UK govt policy should be to achieve full employment
Macro economic objectives of the government will include: low inflation, increasing the sustainable growth rate, full employment and balance of payments equilibrium.
Full employment involves zero or very low unemployment. In practice there will always be some frictional unemployment as people are looking for new jobs or leaving school. Economists suggest an unemployment rate of 3% is close to full employment. However, it is difficult to determine precisely. Full employment implies the macro economy is operating at its full capacity and there is no output gap or demand deficient unemployment.
High unemployment has various social and economic costs. Firstly, the unemployed will have low income enabling little consumption. Also, the unemployed will become de motivated and deskilled. This makes it more difficult to find employment in the future, (this is the Hysteresis effect) The govt will have to spend more on unemployment benefits this will increase governmentt borrowing. Finally, unemployment may exacerbate social problems such as crime and vandalism, especially if unemployment is concentrated amongst young people.
To achieve full employment Keynesians will argue that it is necessary to increase AD when the economy is in a recession.
This can be achieved by loose fiscal or monetary policy e.g. lower interest rates. It may cause inflation to increase, but, if there is spare capacity there will only be a small increase. Keynesians argue the economy can be below full capacity for a long time if consumer confidence is low, and a negative multiplier effect reduces AD further.
The Phillips curve suggests there is a trade off between inflation
Monetarist disagree with Keynesians. They argue that unemployment cannot be reduced below the Natural rate without causing inflation. Also, any reduction will be just a temporary fall. This is because the economy will return to the equilibrium level of output.
Therefore, Monetarists don’t believe there is any point in reducing unemployment below the natural rate because the only effect will be to increase inflation.
However, it is worth trying to reduce the natural rate of unemployment by using supply side polices. For example, better education can improve workers skills and therefore reduce structural unemployment. However, these will take time and it may not be possible for the govt to reduce all unemployment.
Low unemployment can also be achieved through keeping inflation low and maintaining steady and sustainable growth. E.g. in the 1990s, both unemployment and inflation fell due to supply side policies and effective demand management by the MPC. Therefore, this suggests that a low inflation target is effective in meeting other objectives as well. However, this may prove more difficult if there was an adverse shock to the economy.
Overall low unemployment is a desirable objective, but the policies to achieve this need careful examination. Increasing AD will only be effective if there is a recession. To reduce the natural rate, supply side policies will be needed.
Macro Economic Essays
Revision Notes on Unemployment
Which is Correct? - Monetarist or Keynesian View
Unemployment Essays
- Explain what is meant by Natural Rate of Unemployment?
- What Can Cause Natural Rate of Unemployment to Change over time?
- Should the Main Macro Economic Aim of the Government be Full Employment?
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