Gm545 Pp2

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Chapter 16 Question#11:
Describe the three types of unemployment. What types of government programs would be most effective in combating each type of unemployment?

Cyclical: also called demand deficient, cyclical unemployment varies with a country’s business cycle and thus is temporary. Cyclical unemployment is negatively correlated to a country’s GDP – if the economy is expanding, cyclical unemployment is low; if the economy is contracting, and this type of unemployment rises. Reducing Cyclical Unemployment:

Most economists believe that an increase in cyclical unemployment is caused by a decrease in aggregate demand. Since aggregate demand is affected negatively by increase in interest rate, the government can impose law that can alter or minimize interest rates. This will then turn the table around and allow and increase or steady aggregate demand. If wages and other input prices are "sticky," the economy can experience relatively long periods of cyclical unemployment and policies will be needed to reduce the unemployment. Expansionary fiscal and monetary policies can be used

Structural: changes in the structure of an economy is a more long-term and chronic type of unemployment. Structural unemployment does not follow variations in the business cycle. Rather, it is caused by a discrepancy of the skills of the worker and the demand for those skills in the marketplace. Structural unemployment often occurs when there is demographic change, large-scale industrial layoffs, and/or a mismatch between skills and available jobs (i.e., due to technological advances) Reducing Structural Unemployment

Policy suggestions to reduce structural unemployment include providing government training programs to the structurally unemployed, paying subsidies to firms that provide training to displaced workers, helping the structurally unemployed to relocate to areas where jobs exist, and inducing prospective workers to continue or resume their education.

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