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Monday, 23 January 2012

Government Policies to Reduce Unemployment

For government to use the correct policy to reduce unemployment, they must first recognise the cause of unemployment (see here). Using Keynesian fiscal policy to increase AD may be ineffective if structural unemployment is taking place, for example, since this will simply result in inflation.

Free market view
Government policies should only be aimed at reducing structural, frictional and real wage unemployment. Cyclical and seasonal unemployment can be resolved through the market mechanism. Setting markets free can encourage competition and enterprise culture, creating more jobs. Supply can create its own demand.

Keynesian view
The government should intervene to correct the market failure that causes unemployment. They should try to make markets function better, giving them a greater role that the free market economists believe.

Case Study – Government ‘Work Programme’

·       Aimed at reducing long term unemployment and tackling youth unemployment
·       It is a partnership with private companies