Solutions to Unemployment problem

Atempts to reduce the level of unemployment beyond the Natural rate of unemployment generally fail, resulting only in less output and more inflation. However the following ways may reduce unemployment.

Phillips Curve

It used to be largely believed that unemployment could be solved using the Phillips curve. This involves increasing inflation to reduce unemployment by fooling workers into accepting jobsat a lower rate than they would otherwise have done, due to the declining value of money. However, since the work of Milton Friedman, it is widely accepted that the Phillips curve is vertical in the long run: you cannot achieve a lowering of the unemployment rate in the long run, and attempts to do so will only cause inflation.

Demand side policies

Monetary policy and fiscal policy can both be used to increase short-term growth in the economy, increasing the demand for labour and decreasing unemployment. The demand for labour in an economy is derived from the demand for goods and services. As such, if the demand for goods and services in the economy increases, the demand for labour will increase, increasing employment and wages.

Supply side policies

Minimum wages and union activity keep wages from falling, which means too many people want to sell their labour at the going price but cannot. Supply-side policies can solve this by making the labour market more flexible. These include removing the minimum wage and reducing the power of unions, which act as a labour cartel.
Other supply side policies include education to make workers more attractive to employers. Cutting taxes onn businesses and reducing regulation, create jobs and reduce unemployment.

Shifting tax burden

This method will shift tax burden to capital intensive firms and away from labour intensive firms. In theory this will make firms shift operations to a more politically desired balance between labour intensive and capital intensive production. The excess tax revenue from the jobs levy would finance labour intensive public projects. However, by raising the value of labour artificially above capital, this would discourage capital investment, the source of economic growth. With less growth, long-run employment would fall.



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