How to solve unemployment

Written by sujata srinivasan
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How to solve unemployment
There are different theories about how to create jobs. (jobs image by Ewe Degiampietro from Fotolia.com)

Let's face it, it's just not possible for every willing worker to find a job. The reason? Perhaps there are more people than there are job opportunities, perhaps jobs are being outsourced to reduce costs, or perhaps the economy is not growing at a robust pace. In any case, opinion differs on who should be responsible for creating jobs. The government or the private sector, or both? These are no easy answers.

Skill level:
Challenging

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Instructions

    Expansionary Fiscal Policy

  1. 1

    Proponents of Keynesian economics advocate that unemployment can be alleviated by government spending, referred to as an expansionary fiscal policy. Upon approval from Congress, the government increases its spending of taxpayer money with the goal of increasing the demand for labour, goods and services.

    How to solve unemployment
    Government spending leads to job creation. (dollars image by peter Hires Images from Fotolia.com)
  2. 2

    Increased government spending or a stimulus package results in increased demand for production factors, primarily labour, required to create specific goods and services.

  3. 3

    This results in a temporary increase in output and a corresponding decrease in unemployment.

  4. 4

    When unemployment decreases, more people are able to buy goods and services, which in turn stimulates the economy and creates more employment opportunities.

    Supply Side Economics

  1. 1

    While Keynesian economists aim to reduce unemployment by increasing consumer demand through higher government spending, proponents of supply side economics argue that employment opportunities are created by producers/suppliers. So the emphasis is on limited government and a strong private sector.

    How to solve unemployment
    The focus is on production. (factory image by e1129783 from Fotolia.com)
  2. 2

    Upon approval from Congress, the government lowers income taxes and a host of other taxes.

  3. 3

    Reducing taxes encourages producers to make more goods, investors to invest more money, and people to work more since they retain more of their earnings.

    Free Market Policies

  1. 1

    Proponents of free market argue that the production and consumption of goods and services is a function of the private sector, not the government. Therefore the role of government does not include creating jobs.

    How to solve unemployment
    Free market ensures a balance between demand and supply of labour. (economy avenue, concept photo image by Albo from Fotolia.com)
  2. 2

    Minimal government results in a minimal regulatory environment, with no minimum wage laws and lower unemployment benefits.

  3. 3

    With less regulation, companies hire workers at a price attractive to them. With reduced unemployment benefits, more people re-enter the workforce earlier than they would have if the benefits were prolonged.

Tips and warnings

  • Critics argue that an expansionary fiscal policy is only a Band-Aid type of solution; it doesn't fix the problem. To the contrary, it distorts the vital free market mechanism of demand, supply and prices
  • According to an economic model called the "Philips curve," in the long-run, a society must choose a trade-off between unemployment and inflation. The higher the rate of employment, the higher the inflation.

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