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Employment and Unemployment » Policies to Reduce Unemployment

What you'll learn this session

Study time: 30 minutes

Cambridge spec: 4.6.5

The main policies a government can use to reduce unemployment
How to match each policy to the type of unemployment it suits
Why some policies work better, or more slowly, than others
How to judge the effectiveness of a policy in the exam

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One problem, many cures

You have seen that unemployment has different causes and does a lot of damage. The key idea in this lesson is simple: the right cure depends on the type of unemployment. A policy that fixes one type may do almost nothing for another.

Think of a doctor. A broken leg and a cold need different treatment. In the same way, a government must work out what is causing the unemployment before it chooses a policy.

Key terms:

Retraining: teaching unemployed workers new skills so they can move into jobs that are in demand.
Job information: making it easy for workers to find out which vacancies exist, for example through job centres and job websites.

Policies for cyclical unemployment

Cyclical unemployment happens when total spending in the economy is too low. Firms sell less, so they hire fewer workers. The cure is to raise spending so firms want more workers.

💰 Expansionary fiscal policy

Tax cuts or more government spending raise spending, so firms hire more.

🏦 Expansionary monetary policy

A cut in interest rates raises spending and investment, so firms hire more.

How effective? These policies work best when there is plenty of spare capacity, because firms can raise output without delay. They are less effective if consumers and firms are too worried to spend, even when interest rates are low. They also take time to work, and they can push up prices if the economy is already close to full capacity. They do little for structural unemployment, because the jobless workers do not have the skills that the new jobs need.

Policies for structural unemployment

Structural unemployment happens when the jobs that exist do not match the skills or the location of the workers. Spending is not the problem, so the cure is to help workers fit the jobs. These are supply-side measures.

🎓 Training and retraining

Colleges and training schemes teach new skills. A former factory worker learns to install solar panels.

🚚 Help to move

Grants towards moving costs, cheaper housing in growing towns and better transport links make it easier to take a job elsewhere.

🏭 Attracting new firms

Tax breaks or new roads in a struggling area encourage firms to open there and create jobs close to where people live.

How effective? These policies tackle the real cause, so they can work well. But they are slow. A course can take months or years, and a new college or road takes longer still. They are also costly, and older workers may find it harder to learn new skills or to move away from family. Training only helps if the skills taught match the jobs that are really available.

Policies for frictional unemployment

Frictional unemployment is the short wait between jobs. The jobs exist and the workers have the skills, but it takes time to find each other. The cure is better and faster information.

Government job centres and free online job boards list vacancies in one place.
Careers advice helps people see which jobs they could apply for.
Lower unemployment benefits can encourage people to search harder, although this may cause hardship, so many people disagree with it.

How effective? Job information is cheap and quick, so it is a very good fit for frictional unemployment. But it cannot create jobs. If there are too few vacancies, or the workers lack the right skills, better information alone will not solve the problem.

Seasonal unemployment

Seasonal unemployment is hard to cure with policy, because it follows the time of year. A government can help by passing on information about off-season work, or by encouraging firms in the area to offer other activities during the quiet months. Even so, some seasonal unemployment usually remains.

Matching policy to the type

Type of unemployment	Best-fit policy	Main weakness
Cyclical	Expansionary fiscal or monetary policy	Slow, may raise prices, depends on confidence
Structural	Training, retraining and help to move	Slow and costly
Frictional	Job information	Cannot create new jobs

The measures in the table work as you studied in the lessons on fiscal policy, monetary policy and supply-side policy. Here the new skill is choosing the right one for the problem.

Worked example

Country Brisenna has two problems. In the capital, 8,000 office workers have lost their jobs after a fall in spending, and many firms have empty desks. On the northern coast, a shipyard has closed and 3,000 welders cannot find work because the new local jobs are in computer repair.

Capital: this is cyclical unemployment, so the best policy is expansionary fiscal or monetary policy, such as a tax cut, to lift spending.

Northern coast: this is structural unemployment, so retraining the welders and helping them move, or attracting new firms, is better. A tax cut would do much less, because the welders do not have the skills that the repair firms need.

Common mistakes

Saying that one policy cures every type of unemployment. Always link the policy to the cause.
Suggesting a tax cut for structural unemployment without saying that workers also need new skills.
Listing policies with no comment on effectiveness. Say how well it works, and how quickly.
Forgetting that policies have costs and side effects, such as higher prices or a bigger budget deficit.

Exam-style question

Quillon is a country where many car factories have closed. Jobs are being created in the growing software industry, in a city far from the old factories. The unemployed car workers do not have software skills.

(a) Identify the type of unemployment described. [1 mark]

(b) Explain one policy the government of Quillon could use to reduce this unemployment. [3 marks]

Model answer

(a) Structural unemployment. (1)

(b) The government could fund retraining courses in software skills. (1) Workers would learn the skills that the new jobs need. (1) This would make them employable in the software industry, so unemployment falls. (1)

(c) An expansionary fiscal policy, such as a tax cut, would raise spending and could create some jobs in shops and services. (1) It would be quick to start. (1) However, the unemployed workers lack software skills, so firms in the growing industry would still not hire them. (1) The jobs are also in a different city, so the workers may not be able to move. (1) Retraining and help to move would tackle the real cause, although they take time and cost money. (1) So expansionary fiscal policy is not the best way on its own; training and mobility help would be more effective for this type of unemployment. (1)

Exam tip

In a "Discuss" question, name the type of unemployment first, then say whether the policy fits it. That one link earns marks in parts (b) and (c).

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