Question

Please I need today answer for This question and it is very important and I need solution for this issue with all the details , and help me with all the details.Please write your answer to me by typing, not by handwriting, so that I can read and understand your answer clearly.BR/Hassan

This is an essay question . Write no more than 2 pages (maximum). Only legible answers will be considered. Your task is to explain how employment and/or unemployment is determined according to theories discussed in the course. You may choose to focus on either variable or both.

Question-! What policy advice would you give to a government trying to reduce unemployment?

Answer 1

1. Employment and Unemployment determination

According to classical theory, employment of labour determined in the labour market by the demand for labour and supply of labour. In a profit maximizing economy labour will be demanded upto that point where marginal cost of labour equal to the revenue earned from the selling of total product produced by the additional unit of labour. And also Marginal cost of labour equal to the money wage divided by the marginal product of labour.

Condition for the maximization:

P = MC = W/MP of Labor

It can be written as W / P = MP of Labour

where, W / P is the real wage

We know that the labor curve of the MP indicates the demand for labour by the firm. At a lower wage more labour is required. Therefore demand for labor is inversely dependent on real wages. The aggregate demand curve for labour is the horizontal summation of the demand curve for labour for each individual firm.The aggregate labour demand function is also inversely related to the actual wage rate.Like labor demand, the aggregate supply of labour also depends, but in a direct manner, on the real wage rate.

So labour market will be in equlibirum when demand for the labour equal to the supply of labour.

From above diagram you can see the equilibrium point that is E, where downward sloping demand curve of labour cuts the upward sloping of labour supply. This is the full emploment condition according to this theory. As i have already explained the reason for the downward slopind demand curve of the labour. Reason for the upward sloping of the demand curve is that as real wage rate increases this induces the labour to work more for the more money.According to this theory there is no excess demand for labour nor excess supply of labour. So there is no involuntary unemployment exist, it means those who wishes to engaze at this wage rate will get employment, those who are not willing to work will remain unemployed this is called valuntary unemployment.

Suppose if there is excess supply of labour that is AB, However, given worker competition, the excess labour supply at wage rate (W / P)1 would cause the wage rate to fall to the level of equilibrium (W / P)0 at which the labor market is cleared. If there is (W / P)2, then at this lower wage rate everyone will demand the labour so because of competition among the firms it will raise the wage rate to equilibrium level so again full employment.

This is how unemployment/ employmnet determined in the classical theory

In Keynesian theory, employment level determined by the interaction of Aggregate Demand function with the Aggregate supply function. So any disbalance between these curve will create deficiency in demand. According to him economy will not be in full employment because of defeciency in demand.Deficiency of AD arises when AD less than the AS.

2. Policies for the reduction of he unemployment

A. Fiscal Policy: Government can cut the taxes or increase the government expenditure through varoud welfare schemes and it will increase the income of the people and it will increase their consumption hence AD. Due to this there will be increase in demand for the product of the firms so they will increase their production by employing more labour . So this will certainly reduce the unemploymnet rate.

B. Monetary policy: Suppose Central Bank reduces the repo rate, it will decrease the cost of borrowing so it will induced the people to borrow more for investment and this will increase the AD so again firm will employ more labour to increase the production and it will reduce the unemployment rate.