Study notes

Unemployment - Policies to Reduce Unemployment

Which economic policies can be used to reduce unemployment?

Distinction can be made between demand-side and supply-side policies to improve the working of the labour market in matching people to available jobs

Reducing occupational immobility: Immobility is a cause structural unemployment.

Policies such as apprenticeship schemes aim to provide the unemployed with the new skills they need to find fresh employment and to improve the incentives to find work. In 2013, over 500,000 people started apprenticeships in the UK.

For many years the poor quality of work-place training has been a concern, with evidence of a persistent skills-gap in the UK. In a report published in 2011, a trade union reported that 11% of British adults do not have any qualifications.In some areas such as parts of Glasgow and Birmingham, more than a third of people of working age have no qualifications.

Reducing the geographical immobility of labour: Many people have the right skills to find fresh work but factors such as high house prices and housing rents, family and social ties and regional differences in the cost of living make it difficult and sometimes impossible to change location in order to get a new job. Many economists point to a persistently low level of new house-building as a major factor impeding labour mobility and the chances finding new work.

Benefit and tax reforms: To some economists, a policy that reduces the real value of welfare benefits might increase the incentive for the unemployed to take a job. But it is rare that the root cause of someone staying out of work is the prospect of out of work welfare handouts. Targeted measures to improve people's incentives might include linking welfare benefits to participation in work experience programmes or lower marginal tax rates for people on low incomes.

Boosting aggregate demand:

  • A Keynesian-style stimulus is an active policy during a recession.This might include increases in state investment spending or lower taxes to boost disposable income
  • Both are a fiscal stimulus. Many governments have turned to fiscal policy as a way of creating new jobs; some economists refer to such programmes as providing 'shovel-ready' jobs, typically involving construction projects that are labour intensive
  • The hope is that extra spending on new roads, housing and other infrastructure projects will lead to a strong positive multiplier effect on output, incomes and jobs.

Employment subsidies and/or employment tax cuts (demand-side policy):

  • Government subsidies for businesses that take on the long-term unemployed – for example, as part of the UK Youth Contract, payments of up to £2,275 are available to employers who take on young people (aged 18-24) who have been claiming JSA for more than six months
  • Lower taxes on businesses that employ more workers might be effective, for example cuts in employer national insurance contributions for young, low-paid workers

Changing the participation age

From 2013, young people in the UK will be required to continue in education or training until they turn 17 and from 2015 they will be required to continue in education or training until they turn 18.

Will job guarantees help to lower unemployment?
Will job guarantees help to lower unemployment?

Globalisation, Unemployment & Inequality

Globalisation and technological change favour the highly skilled. In the middle of the income distribution, a strong pair of arms, a willingness to work hard and a bit of common sense used to provide a comfortable income. No longer

Source: Tim Harford, Financial Times

Evaluation on Unemployment Policies

Unemployment policies are designed to

  1. Improve skills / human capital to make people more flexible in the workplace
  2. Provide stronger incentives to look for and accept work
  3. Increase the occupational and geographical mobility of labour
  4. Maintain a sufficiently high level of demand to create enough new jobs
  5. Encourage entrepreneurship and innovation as a way of creating new products and market demand which will generate new employment opportunities

There are always cyclical fluctuations in employment. If growth can be sustained it should be possible to create a steady flow of new jobs. There are always changes in the pattern of demand for different jobs – the labour force needs to be sufficiently flexible to deal and adjust to this.

An economic recovery creates new jobs; the issue is whether people in the labour market have the right skills, qualifications and experience to take them – many training schemes lead to qualifications which don't necessarily help people back into work.

Demand and supply-side policies need to work in tandem for unemployment to fall. Simply boosting demand if the root cause of unemployment is structural is an ineffective way of tackling the problem. If demand is stimulated too much, the main risk is rising inflation

Full-employment does not mean zero unemployment! There will always be some frictional unemployment – it may be useful to have a small surplus pool of labour available. Most economists argue that there will always be some frictional unemployment of perhaps 2-3% of the labour force.

There are still large regional differences in unemployment levels which causes significant economic and external costs. Urban and regional regeneration can take decades to achieve

Youth unemployment by country

Policies for Reducing Unemployment – Key Themes

  • Boosting human capital - education and training - a long run strategy to make the workforce more employable and to raise the level of labour productivity
  • Lower employment taxes to increase labour demand - for example, a reduction in national insurance contributions
  • Stimulus to demand from both the public and private sector - keeping aggregate demand high to drive the creation of new jobs
  • Improved export competitiveness to provide an injection of demand into the circular flow of income
  • Improving work incentives - making work pay to reduce benefit dependency and expand the size of the labour supply

Raising the total level of employment is an important aim of labour market policies. The UK economy has seen some success in this regard in the last few years.

Statistic: Number of workforce jobs in the United Kingdom (UK) from December 2011 to September 2014 (in thousand jobs) |<img src=
Find more statistics at Statista

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