Question

(a) 10 marks What are the costs of unemployment to people who are unemployed and to society as a whole? (b) 10 marks What is the equilibrium unemployment rate? What policies can governments use to reduce the equilibrium unemployment rate? Explain your answer using a diagram. (c) 10 marks Under what conditions are demand management tools likely to be effective in reducing unemployment?

Answer 1

a)Unemployment people lose income and there is a lot of impact  in their physical and mental life.There will be less consumption and people will turn to their savings which have serious problem for the future.Unemployment for a long time may lead to loss of skill .People become pessimistic about the value of education.Children may be denied education and the economy will suffer in the future.  Society faces cost that is not just financial.Cost to the society include rise in crime rate and reduction in volunteerism.There will be restrictions in immigration and protectionism will rise.

b)The difference between workers who want a job at the current wage rate and those who are willing and able to perform such work is the equilibrium wage rate.The difference between the labor force and labor supply is the rate of unemployment or equilibrium unemployment.

The policy that helps to reduce equilibrium unemployment is to provide encouragement to workers and labor force to adjust to change.The workers in this process can better their skills and move to different industries, regions and occupations according to the demand for labor.Again subsidies may be offered to set up firms where there is higher unemployment.

In the fig ADL is the demand for labor, ASL is the supply of labor .N is the total labor force.The difference between labor force and labor supply is the rate of unemployment or equilibrium unemployment.

DOHS O 21 CAL

c) Demand management tools are efforts to increase aggregate demand with tools like monetary policy and fiscal policy. Exchange rate would also influence aggregate demand.Confidence also affects demand.If the government can increase confidence there will be increase in investment and consumer spending.Fiscal policy can change government spending and taxation.Monetary policy involves cutting or increasing interest rate.The condition is if effective supply side policies are introduced, the demand management policies can reduce unemployment.In some cases such supportive demand policies may be effective with mild increase in inflation. Demand management policies are best managed  with monetary rather than fiscal policies.