V. Policies to Reduce Unemployment [PDF]

Chapter 12 Outline V. POLICIES TO REDUCE UNEMPLOYMENT A. Reducing Cyclical Unemployment 1. Most economists believe that an increase in cyclical unemployment is caused by a decrease in aggregate demand. 2. If wages and other input prices are "sticky," the economy can experience relatively long periods of cyclical unemployment and policies will be needed to reduce the unemployment. 3. Stabilization policies, government policies intended to maintain full employment and a reasonably stable price level, can be used. a. Expansionary fiscal and monetary policies can be used. 4. There is a tradeoff between reducing unemployment and increasing the price level. a. If the economy is at full employment, expansionary policies will simply increase the price level and leave output unchanged. 5. Despite the use of stabilization policies, we still observe cyclical movements in the unemployment rate and price level. a. These fluctuations occur because it is difficult to know how much to change variables such as government spending when using stabilization policy and because it is difficult to use stabilization policy in a timely manner. B. Reducing Structural Unemployment 1. Policy suggestions to reduce structural unemployment include providing government training programs to the structurally unemployed, paying subsidies to firms that provide training to displaced workers, helping the structurally unemployed to relocate to areas where jobs exist, and inducing prospective workers to continue or resume their education. C. Reducing Frictional Unemployment 1. Policy suggestions to reduce frictional unemployment include establishing a computerized national job bank that would provide job seekers and prospective employers with better information and implementing apprenticeship programs similar to those used in Austria and Germany. [ Return to Textbook Materials Page