The government uses four policies to address unemployment, which are the minimum wage, unemployment compensation, subsidies for hiring costs, and public spending to equalize effectiveness. Fiscal policy can reduce unemployment by helping to increase aggregate demand and the rate of economic growth. The government will have to implement an expansionary fiscal policy; this involves reducing taxes and increasing public spending. Reducing taxes increases disposable income (for example, reducing VAT to 15% in 2020) and, therefore, helps to increase consumption, leading to an increase in aggregate demand (AD).
Reducing taxes works like lowering interest rates. Both offer businesses and consumers more money to spend. It gives companies more money to invest and hire more workers. Cyclical unemployment is the result of a general decline in macroeconomic activity that occurs during a contraction in the economic cycle.
In addition, policy makers can also depreciate the exchange rate to boost export demand or introduce specific laws and initiatives aimed at particular areas of the economy. It has been suggested that a maximum workweek of (for example, 35 hours) would lead companies to hire more workers and reduce unemployment. They are not intended to boost general aggregate demand, but rather seek to overcome labor market imperfections and reduce unemployment caused by supply-side factors. In addition, when there is strong economic growth and greater aggregate demand, fewer jobs are lost, because companies are still active.
Sometimes, policy makers can also introduce specific initiatives aimed at particular areas of the economy in order to reduce unemployment and increase production. Unlike other types of unemployment, which are inherent to a particular profession or to a prosperous and growing economy, cyclical unemployment can be avoided by stabilizing fluctuations in the economic cycle. In addition, if it makes it difficult to apply for benefits, it may reduce the number of applicants, but not the international labour force survey. A study conducted during the Great Recession showed how long-term unemployment can harm the long-term earning potential of workers, which may affect the economy in the coming years.
The objective of expansionary monetary policy is to increase aggregate demand and economic growth by reducing interest rates. Therefore, it is the government's job to create additional demand and to intervene to reduce unemployment. Supporters of the supply-side economy say that, over time, tax cuts boost the economy enough to replace any loss in tax revenues, but according to the Laffer curve, that's only true if taxes exceed a certain threshold from the start. The natural employment rate is an estimate of how low unemployment would be when inflation remained stable and economic output remained stable.
It also indicates the success or failure of fiscal and monetary policies over the years, as they affect the unemployment rate. With an increase in AD, there will be an increase in real GDP (as long as there is excess capacity in the economy).
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