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The Main Factors Of Macroeconomic Polices Economics Essay

Unemployment occurs when the number or amount of people in an economy, that are ready to work, but cannot get a job. It refers to a condition when “aggregate demand for the labour is less than the aggregate supply of labour”, Unemployment is critical cost to an economy. The UK government has suffered with the dispute of accomplishing a continuous reduction in unemployment, especially in the recession.

Lower tax rates will increase consumer’s disposable income and will also increase household spending. If taxes are cut then it will better for people on lower average income, these tax payers, will likely to spend more of their disposable income, so consumption will increase meaning demand will increase. However if reduced taxes on firms, it will also mean they will have more money to pay more workers, therefore means more people will be hired and fewer unemployed, which increases efficiency.

Lowering interest rates will reduce cost of borrowing and will therefore encourage investment and spending. Also cutting interest rates will make people pay less mortgage payments, which will give homeowners more disposable income and therefore people will start spending more and will increase demand and consumption. On a whole lowering interest rates is a factor which will help investment and consumer spending to increase hence there will be a rise in aggregate demand. Having extra capacity in the economy, will mean economic growth will be an increase, hence firms will demand and require for workers, this will reduce demand defective unemployment. However there would be a number of problems if lowered interest rates, they would be, lowering interest, if confidence is very low then it will not increase consumer spending for example in a recession, to invest, many people may not want to barrow, even thought if interest rates are very low. Another problem is reducing interest rates, it will not cut the supply area of unemployment, and it will only solve demand deficient unemployment.

Reducing welfare benefits will increase the motivation for unemployed people to take a job. It will reduce the search times between jobs even further, as unemployed people will have a quicker take on new position before their financial situations become worse. However if unemployed people decided to work and their on benefits they would not get any extra income after tax. However the new deal programme that the government has introduced of lower marginal income tax rates for people who are on low incomes might have a clear impact. Cutting the level of welfare benefits, it makes a small difference to the level of unemployed in the long run.

Reducing or abolishing minimum wage will get more unemployment people to get a job, More companies is likely to take on more employees due to they can afford, and pay more employees less wages. However the company may abuse the system and pay them less then they should do. Also trade unions can cause real wage and standard unemployment, however if they reduce the control of trade unions then wages will fall to equilibrium levels leading to reduction of unemployment and reducing minimum wages.

If lowered the value of the pound, then foreign companies will do more business with the UK firms, due to there will be an increase orders of exports from firms within the UK, and there will be a reduction of import entrance, this will therefore make imports further more expensive and exports more cheaper.

Education and training is a vital policy, as most jobs require qualifications and certain skills to do the job, and however the government has currently set up the “New deal” (Tutor2u by Geoff Riley) programme which focuses to reduce the number of long-term unemployed in the UK. The government should subsidise unemployed people to get the right education and training, this will increase human capital of these workers, hence will give them a better opportunity to take on new jobs that will be obtainable.

The government can use polices such as lower interest rates and direct tax to increase the level of aggregate demand. The diagram shows, in the aggregate demand we can see an increase, this leads to an expansion and growth of aggregate supply, this is because of the rise in demand for output. At each wage rate, the demand for labour will grow which therefore leads to an increase in total employment.

(Source-Tutor2u by Geoff Riley)

Monetary policy is a way of handling money; its when the Bank of England can force extra more money into the banking systems, to increase the rate to motivate people to hold on to their money or save it, and also to lower interest rates. Therefore there is money to be made if people spend more and firms will employ a lot more people to help the increase in production. If the liquidity preference money supply curve is not flat then monetary policy would shift aggregate supply to the right. In the short run, price levels are fixed, and the output is constant, however in the long run it aims to keep inflation low, which gives a surrounding which is effective for employment growth and investment.

Fiscal policy will make the aggregate demand increase and will shift it to the right; as long as the Investment Saving curve is not flat; for instance many people will borrow money no matter what the interest levels are. Nevertheless using our common knowledge we know that people in developed economies are very aware of the interest rates, so this concludes that the Investment Saving curve is flat. Fiscal policy is one of those polices which can have a lot of power resources, and can cut down the rise and fall of the business cycle by changing the amount that the government is spending. So with the government spending money this will effect the economic growth, and influence unemployment etc.

I think unemployment is a major factor which needs to me dealt with and the government should take effective policies that are mentioned above into account, so that unemployment reduces and more people will be likely to be employed. I think the government should put their foot down and take some above polices into accounts that I have mentioned above or in the future I think unemployment will start to increase which is not good for the economy. However some economist argues that some polices may increase unemployment such as reducing the minimum wage, the government need to re-think these polices to reducing unemployment. With the new deal programme currently running, the government needs to tackle factors which will reduce the number of unemployment with this scheme.

Harvard References

Politics 2008, what is unemployment? By Jenny Willott [Online] (Written/Updated 8th September 2008) Available at$366619.htm [Accessed 18th December 2009]

Bukisa 2007, Economic Policies to Reduce Unemployment by Peit Jones [Online] (Published 28th May 2009) Available at [Accessed 20th December 2009]

Tutor2u, policies to reduce unemployment [Online] by Geoff Riley (Published 13th march 2003) Available at [Accessed 21st December 2009]

Economics help 2008, Reducing Unemployment by Using Monetary Policy [Online] (Published 6th October 2008) Available at [Accessed 22nd December 2009]

Tutor2u, unemployment [Online] by Geoff Riley (Published 11th November 2006) Available at [Accessed 22nd December 2009]

Revision Guru, Policies to Reduce Unemployment [Online] by Steve Margetts (Published 12th August 2007) Available at [Accessed 23rd December 2009]

Library Economics Liberty 2009, Cutting the Minimum Wage Really Is Good for Aggregate Demand, [Online] by Paul Krugman (Published 16th December 2009) Available at [Accessed 24th December 2009]

Yahoo answers, How can Policies be used to reduce unemployment? [Online] by Ingenious Jones (Published 29th September 2008) Available at;_ylt=Aku2ruclZduPiPHWIQePwVNJBgx.;_ylv=3?qid=20090906031638AAZBgJ4 [Accessed 26th December 2009]

Economics help, Supply Side Policies for Reducing Unemployment, [Online] (Published 28th April 2008) Available at [Accessed 27th December 2009]

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