Question

1. Explain two policy recommendations that can reduce the natural rate of unemployment.

Answer 1

Fiscal policies can reduce unemployment by helping to boost aggregate demand and the rate of growth. The country will continue to follow ambitious economic policy; that will include tax cuts and higher budget spending. Lower taxes increase disposable income (e.g. VAT reduction to 15% in 2008) and thus contribute to higher consumption leading to higher aggregate demand ( AD). There will be an increase in Actual GDP (as long as there is surplus capacity in the economy) and an increase in AD. As companies produce more, there will be an rise in competition for jobs and hence lower job-deficient unemployment.

Monetary policy would involve interest rate cuts. Lower rates reduce interest costs, which promote consumption which expenditure by individuals. This increases AD and should also help to raise GDP and reduce demand-deficient unemployment. Also, lower interest rates will lower the exchange rate and make exports competitive Lower interest rates can in some cases be ineffective in boosting demand. Central banks can in this case resort to quantitative easing. This is an effort to increase the supply of capital, and to raise aggregate demand.

Education and training. The goal is to provide new skills to the long-term unemployed, allowing them to find employment in emerging sectors, such as retraining unemployed steel workers to have basic I.T. Skills that help them find employment in the services sector. – Given the provision of schooling and training programs, the unemployed may not or may not be able to learn new skills. Reducing lessness will take many years, at best.