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Unemployment

Choosing between demand side and supply side approaches

  • 3 things to know
  • All three components

Overview

Main constraint on using expansionary policy to cut unemployment, deadweight loss in an employment subsidy and substitution in the context of employment subsidies.

What you need to know

Answer each one before you reveal it.

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Key term

How are approaches to reducing unemployment broadly characterised?

Key term

Why does the appropriate solution depend on the nature of unemployment?

Key term

How can a government identify whether unemployment is cyclical?

Questions from this subtopic

Each one with the model answer underneath.

  1. 1

    How are approaches to reducing unemployment broadly characterised?

    Model answer

    Approaches to reducing unemployment are broadly characterised as either demand side or supply side. Demand side measures raise total spending while supply side measures improve the labour market.

  2. 2

    Why does the appropriate solution depend on the nature of unemployment?

    Model answer

    Cyclical unemployment responds to higher aggregate demand, while structural unemployment responds to retraining. The wrong remedy wastes money and leaves the problem in place.

  3. 3

    How can a government identify whether unemployment is cyclical?

    Model answer

    A negative output gap alongside falling vacancies suggests cyclical unemployment. Unemployment rising across all industries at once points the same way.

  4. 4

    How can a government identify whether unemployment is structural?

    Model answer

    High unemployment alongside unfilled vacancies suggests a structural mismatch. Concentration in particular regions or industries confirms the diagnosis.

  5. 5

    Why are demand side and supply side policies often used together?

    Model answer

    Demand side policy delivers a quick fall in cyclical unemployment. Supply side policy lowers the natural rate over the longer term.

  6. 6

    What is the main constraint on using expansionary policy to cut unemployment?

    Model answer

    Expansionary policy risks inflation once the economy nears full capacity. The scope for demand expansion depends on how much spare capacity exists.

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