policies to reduce unemployment

In the long term, effective policies to reduce the total level of unemployment need to encourage

An improvement in the employability of the labour supply - so that the unemployed have the right skills to take up the available job opportunities. Policies should focus on improving the occupational mobility of labour

An improvement in the incentives for people to search and then accept paid work - this may require some reforms of the tax and benefits system

A sustained period of economic growth so that new jobs are being created - this requires that aggregate demand is sufficiently high for businesses to be looking to expand their workforces

Improving skills and reducing occupational immobility
Policies should provide the unemployed with the skills they need to find re-employment and improve the incentives to find work. Structural unemployment is the result of workers being occupationally immobile - improvements in education and training will increase the human capital of these workers, and therefore give them a better chance of taking the new jobs that become available in the economy.

Reflating Aggregate Demand

The government can also use macro-economic policies to increase the level of aggregate demand. These policies might involve lower interest rates or lower direct taxes. It might also encourage foreign investment into the economy from foreign multinational companies. In the diagram below we see an increase in aggregate demand leading to an expansion of aggregate supply. Because of the increase in demand for output, the demand for labour at each wage rate will grow - leading to an increase in total employment.

Not every increase in demand and production has to be met by using more labour. Each year we expect to see a rise in labour productivity (more output per worker employed). And, businesses may decide to increase production by making greater use of capital inputs (machinery and technology).

Benefit and Tax Reforms
Reducing the real value of unemployment benefits might increase the incentive to take a job - particularly if the real worth of unemployment benefits is well below the national minimum wage rate.
Targeted measures are designed to help the long-term unemployed find re-employment (including the Government's "Welfare to Work Schemes" - see New Deal

Employment Subsidies
Government subsidies for those firms that take on the long-term unemployed will create an incentive for firms to increase the size of their workforce. Employment subsidies may also be available for overseas firms locating in the UK.

Economic Growth and Unemployment
A growing economy creates jobs for people entering the labour market for the first time. And, it provides employment opportunities for people currently unemployed and looking for work

The chart above shows the level of real national output (GDP) and total employment in the economy since 1980. In both of the last two recessions (1980-81 and 1990-92), the number of people in work has fallen sharply. But a period of sustained economic growth (as experienced by the UK from 1993-2001) has led to a significant increase in employment levels. Indeed by the summer of 2001, employment in the British economy was at record levels. This has helped reduce the official measures of unemployment to a level not seen for over twenty-five years.