unemployment

Does Fiscal Policy solve unemployment?

Does Fiscal Policy solve unemployment?

Readers Question: Is the fiscal policy effective/the best policy to deal with unemployment? It is an interesting question and one that is likely to generate different views from within the ranks of economists. To give a very rough overview:Keynesians say yes, fiscal policy can be effective in reducing unemployment. In a recession, expansionary fiscal policy will increase Aggregate Demand (AD), causing higher output, leading to the creation of more jobs. Classical/monetarist economists say no. Fiscal policy will only cause a temporary increase in real output. In the long run, expansionary fiscal policy…

Types of Unemployment

Types of Unemployment

Readers Question: What are the types of unemployment? Firstly, we can make a distinction between:Supply-side unemployment (the natural rate of unemployment). These are usually microeconomic imbalances in labour markets. Demand-side unemployment (Unemployment caused by lack of aggregate demand in the economy). In recessions, we can expect demand deficient unemployment (sometimes called cyclical unemployment) to increase significantly.Supply-side unemploymentFrictional – This occurs when people are in between jobs. For example, a school-leaver may take some time to get his first job….

Investment and Aggregate Demand

Investment and Aggregate Demand

Readers Question: What are the effects of increased investment on aggregate demand in the short term and the long term.Investment means capital expenditure (e.g. purchasing machines or building bigger factory) Investment is a component of AD –  AD+ C+I+G+X-M. Investment spending takes about 15% of AD; it is not as significant as consumer spending which is 61%.If Investment increases, then ceteris paribus, AD will increase. Effect of investment in the short-termThe increase in aggregate demand will lead to higher economic…

Structural unemployment

Structural unemployment

Structural unemployment is caused by a mismatch of skills between the unemployed and available jobs. Structural unemployed is caused by changes in the economy, such as deindustrialisation, which leaves some unemployed workers unable to find work in new industries with different skill requirements. Structural unemployment occurs even during periods of strong economic growth. It is a form of supply side unemployment and not insufficient aggregate demand (AD).  Policies to reduce structural unemployment include retraining and geographical subsidies. Fiscal or monetary policy to boost AD will be ineffective in solving structural…

Definition of Unemployment

Definition of Unemployment

Unemployment is defined as a situation where someone of working age is not able to get a job but would like to be in full-time employment. Note: If a mother left work to bring up a child or if someone went into higher education, they are not working but would not be classed as unemployed as they are not actively seeking employment. One grey area is voluntary unemployment. This occurs when the unemployed choose not to take a job a the going wage rate (e.g. wrong job, benefits too high…

Supply Side Policies for Reducing Unemployment

Supply Side Policies for Reducing Unemployment

To what extent can supply side policies reduce unemployment? To try and reduce unemployment, the government can provide interventionist supply-side policies, such as better training and education or it can try free-market policies, such as increasing labour market flexibility. However, there is a limit because supply-side policies are ineffective in dealing with cyclical (demand-deficient unemployment) Examples of interventionist supply-side policies to reduce unemploymentBetter education and training. This provides skills which will help the long-term unemployed to retrain and find jobs in a fast-changing labour market. This can help reduce structural unemployment….

UK Devaluation of Sterling 1967

UK Devaluation of Sterling 1967

In 1967, the UK government of Harold Wilson devalued the Pound from $2.80 to $2.40 (a devaluation of 14%). It was a major political event because the government had tried hard to avoid a devaluation, but felt forced into the decision because of a trade deficit, a weak domestic economy and external pressures from creditors. Background to devaluation of 1967 The government pursued an exchange rate peg of £1 to $2.80. A strong Pound was seen as important for maintaining living standards and providing an incentive for manufacturers to increase productivity…

Definition of Full Employment

Definition of Full Employment

Readers Question: explain how economists define ‘full employment’? The first definition of full employment would be the situation where everyone willing to work at the going wage rate is able to get a job. This would imply that unemployment is zero because if you are not willing to work then you should not be counted as unemployed. To be classified as unemployed you would need to be actively seeking work. This does not mean everyone of working age is in employment. Some adults may leave the labour force, for example, women…