Policies to Reduce Unemployment | Economics for GCSE/IGCSE - Year 11 PDF Download

Demand-side Policies

• Expansionary fiscal policy and expansionary monetary policy aim to boost total (aggregate) demand within an economy. 
  • The need for labor is a direct result of the demand for goods and services. 
  • When the overall demand for goods and services rises, there is an increased need for labor, which helps reduce unemployment rates.
• Any policy that enhances one of the components of real gross domestic product (rGDP) can increase total demand and consequently contribute to lowering unemployment levels.
• Demand-side policies are highly effective in addressing unemployment triggered by a decrease in total (aggregate) demand.
• However, they prove ineffective in mitigating frictional and structural unemployment.
• One drawback of expansionary policies is the likelihood of demand-pull inflation.
• Expansionary monetary policy often exacerbates income inequality, as the poorest households typically do not benefit from it, since banks may not extend loans to them.

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

Supply-side Policies

• Supply-side policies focus on enhancing the quality and quantity of factors of production to boost potential output. 
  • When the output increases, firms will likely demand more workers, potentially reducing unemployment.
• Supply-side policies are typically focused on long-term solutions. For instance, the process of diminishing trade union influence or providing training opportunities is a gradual, extended effort.
• These policies are particularly effective in addressing unemployment stemming from frictional and structural factors. Frictional unemployment occurs when individuals are between jobs, while structural unemployment results from shifts in the economy that lead to job mismatches.
• However, supply-side measures do not effectively tackle unemployment resulting from demand-side issues such as a recession. Demand-side problems arise from a lack of overall demand in the economy, impacting employment levels.

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

Protectionist Policies

• Protectionism entails governmental measures that restrict international trade to safeguard domestic industries, including employment within those sectors.
  • Some domestic firms struggle to compete with international counterparts and face closure without protective measures.
  • To prevent such outcomes, governments may offer subsidies or impose import tariffs on various products, elevating prices of goods or services supplied by foreign competitors.
  • While protectionist policies may safeguard employment in targeted industries, they can lead to heightened unemployment in related sectors.
• For instance, in 2016, the Trump Administration imposed tariffs on all steel imports, safeguarding approximately 1,600 jobs in the steel industry.
  • However, the resultant increase in imported steel prices, a crucial factor of production in numerous industries, led to reduced output and increased unemployment across various related sectors.