Question

Comment in a few sentences. Maintaining full employment is all that is needed to have economic growth.

Answer 1

The main macroeconomic objectives of the government will include: low inflation, increasing the sustainable rate of economic growth full employment and balance of payments equilibrium.

Full employment involves zero or very low unemployment. In practice, there will always be some frictional unemployment as people are looking for new jobs or leaving school. Economists suggest an unemployment rate of 3% is close to full employment. However, it is difficult to determine precisely. Full employment implies the macroeconomy is operating at its full capacity and there is no output gap or demand deficient unemployment.

The main reason for targeting full employment is because high unemployment has various social and economic costs. Firstly, the unemployed will have low income enabling low levels consumption. This low income will lead to relative poverty. Also, the unemployed may become de-motivated and de-skilled. On the job training, is considered important to employers. Being unemployed with no money to spend on training and unable to work can create a negative cycle for the unemployed which makes it difficult for them to find work in the future. People experiencing long-term unemployment find it the most difficult to gain employment. (Hysteresis effect)

Also, during periods of high unemployment, the government will have to spend more on unemployment benefits and also the government will receive lower tax revenues (less VAT, lower income tax). Therefore, high unemployment will increase government borrowing. Finally, unemployment may exacerbate social problems such as crime, vandalism and social alienation, especially if unemployment is concentrated amongst young people who feel alienated by having no jobs.

Therefore, given the costs of unemployment, there are many social benefits to achieving full employment. Also, by achieving full employment, it will have the side-effect of improving other objectives of the government. Lower unemployment will reduce government borrowing and help economic growth. If the unemployed gain work, they will increase spending, and this will cause a positive multiplier effect which helps to increase economic growth.

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