How can cyclical unemployment be reduced

Some people can do a very similar job with a different company, while others must start new career paths. Some people may be near retirement and decide to look only for part-time work, while others want an employer that offers a long-term career path.

The frictional unemployment that results from people moving between jobs in a dynamic economy may account for one to two percentage points of total unemployment.

The level of frictional unemployment will depend on how easy it is for workers to learn about alternative jobs, which may reflect the ease of communications about job prospects in the economy. The extent of frictional unemployment will also depend to some extent on how willing people are to move to new areas to find jobs—which in turn may depend on history and culture. Frictional unemployment and the natural rate of unemployment also seem to depend on the age distribution of the population.

Figure 2 from Patterns of Unemployment b showed that unemployment rates are typically lower for people between 25—54 years of age than they are for those who are either younger or older. But some proportion of those who are under 30 may still be trying out jobs and life options and some proportion of those over 55 are eyeing retirement. In both cases, the relatively young or old tend to worry less about unemployment than those in-between, and their periods of frictional unemployment may be longer as a result.

Thus, a society with a relatively high proportion of relatively young or old workers will tend to have a higher unemployment rate than a society with a higher proportion of its workers in middle age. Another factor that influences the natural rate of unemployment is the amount of structural unemployment. The structurally unemployed are individuals who have no jobs because they lack skills valued by the labor market, either because demand has shifted away from the skills they do have, or because they never learned any skills.

An example of the former would be the unemployment among aerospace engineers after the U. An example of the latter would be high school dropouts. Some people worry that technology causes structural unemployment. In the past, new technologies have put lower skilled employees out of work, but at the same time they create demand for higher skilled workers to use the new technologies.

Education seems to be the key in minimizing the amount of structural unemployment. Individuals who have degrees can be retrained if they become structurally unemployed.

For people with no skills and little education, that option is more limited. The natural unemployment rate is related to two other important concepts: full employment and potential real GDP.

The economy is considered to be at full employment when the actual unemployment rate is equal to the natural unemployment. By contrast, when the economy is below full employment, the unemployment rate is greater than the natural unemployment rate and real GDP is less than potential.

Finally, when the economy above full employment, then the unemployment rate is less than the natural unemployment rate and real GDP is greater than potential.

Operating above potential is only possible for a short while, since it is analogous to all workers working overtime. Unexpected shifts in productivity can have a powerful effect on the natural rate of unemployment. Over time, the level of wages in an economy will be determined by the productivity of workers.

After all, if a business paid workers more than could be justified by their productivity, the business will ultimately lose money and go bankrupt. Conversely, if a business tries to pay workers less than their productivity then, in a competitive labor market, other businesses will find it worthwhile to hire away those workers and pay them more. However, adjustments of wages to productivity levels will not happen quickly or smoothly.

Wages are typically reviewed only once or twice a year. In many modern jobs, it is difficult to measure productivity at the individual level. For example, how precisely would one measure the quantity produced by an accountant who is one of many people working in the tax department of a large corporation? However, when productivity changes unexpectedly, it can affect the natural rate of unemployment for a time.

The U. In the s, productivity growth slowed down unexpectedly as discussed in Economic Growth. For example, output per hour of U. Figure 1 a illustrates the situation where the demand for labor—that is, the quantity of labor that business is willing to hire at any given wage—has been shifting out a little each year because of rising productivity, from D 0 to D 1 to D 2.

As a result, equilibrium wages have been rising each year from W 0 to W 1 to W 2. But when productivity unexpectedly slows down, the pattern of wage increases does not adjust right away. Wages keep rising each year from W 2 to W 3 to W 4. But the demand for labor is no longer shifting up. A gap opens where the quantity of labor supplied at wage level W 4 is greater than the quantity demanded. Over time, the rise in wages will adjust to match the slower gains in productivity, and the unemployment rate will ease back down.

But this process may take years. The late s provide an opposite example: instead of the surprise decline in productivity in the s, productivity unexpectedly rose in the mids. The annual growth rate of real output per hour of labor increased from 1. As a result, real wages were not increasing. Now, productivity jumps upward, which shifts the demand for labor out to the right, from D 0 to D 1.

At least for a time, however, wages are still being set according to the earlier expectations of no productivity growth, so wages do not rise. The result is that at the prevailing wage level W , the quantity of labor demanded Qd will for a time exceed the quantity of labor supplied Qs , and unemployment will be very low—actually below the natural level of unemployment for a time.

This pattern of unexpectedly high productivity helps to explain why the unemployment rate stayed below 4. Average levels of unemployment will tend to be somewhat higher on average when productivity is unexpectedly low, and conversely, will tend to be somewhat lower on average when productivity is unexpectedly high.

But over time, wages do eventually adjust to reflect productivity levels. Public policy can also have a powerful effect on the natural rate of unemployment. On the supply side of the labor market, public policies to assist the unemployed can affect how eager people are to find work. For example, if a worker who loses a job is guaranteed a generous package of unemployment insurance, welfare benefits, food stamps, and government medical benefits, then the opportunity cost of being unemployed is lower and that worker will be less eager to seek a new job.

What seems to matter most is not just the amount of these benefits, but how long they last. A society that provides generous help for the unemployed that cuts off after, say, six months, may provide less of an incentive for unemployment than a society that provides less generous help that lasts for several years. Conversely, government assistance for job search or retraining can in some cases encourage people back to work sooner.

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When there is a rise in cyclical unemployment caused by a recession, it is considered demand-deficient unemployment and addressed by demand-side policies. During a downturn, or recession, aggregate demand declines: household, business, government, and foreign sectors buy fewer goods and services. Unemployment increases because less output is produced, so fewer workers and other resources are needed. Businesses face declining revenues and find themselves forced to cut costs.

As a consequence, they lay off workers. Unlike the other types of unemployment, which are inherent either to a particular profession or a healthy, growing economy, cyclical unemployment can be avoided by stabilizing business-cyle fluctuations.

One of the primary policy goals of macroeconomics is to reduce or eliminate cyclical unemployment. To prevent cyclical unemployment, policymakers should focus on expanding output, which is most effectively achieved by stimulating demand.

The goal of expansionary monetary and fiscal policies is to boost aggregate demand by cutting interest rates and taxes. Additionally, policymakers may also depreciate the exchange rate in order to boost export demand or introduce specific legislation and initiatives that target particular areas of the economy. The goal of expansionary fiscal policy is to manage output and employment through increasing government spending and decreasing taxation.

Lower levels of taxation lead to higher levels of disposable income and an increase in consumption. An increase in consumption results in higher aggregate demand and higher gross domestic product GDP.

Firms will respond to an increase in demand and higher GDP by increasing production, which requires more workers. Therefore, there will be less cyclical unemployment. Additionally, when there is strong economic growth and higher aggregate demand, there are fewer job losses, because companies remain in business. The economist John Maynard Keynes was a proponent of expansionary fiscal policy during recessionary periods.

According to Keynes, there are idle resources—capital and labor—during a recession. Therefore, it is the job of the government to create additional demand and intervene in order to reduce unemployment. The goal of expansionary monetary policy is to increase aggregate demand and economic growth through cutting interest rates.

Lower interest rates mean that the cost of borrowing is lower. This increases aggregate demand and GDP and decreases cyclical unemployment. Sometimes policymakers may also introduce specific initiatives that target particular areas of the economy in order to reduce unemployment and increase output.

Examples of these unique initiatives include streamlining the approval process for government projects that create jobs, giving businesses cash incentives for hiring workers, and paying businesses to train workers to fill specific positions. Federal Reserve. Fiscal Policy. Your Privacy Rights.