Budgetary policy and full employment
Budgetary policy is the primary policy weapon used to tackle the problem of unemployment. While monetary policy can help to create employment by stimulating AD and the economy more generally, budgetary policy has much more versatility. The Government can use the budget to stimulate AD and create jobs at a macroeconomic level by delivering more expansionary budget outcomes. In addition, it can focus on particular sectors of the economy to assist in re-training labour, helping to reduce structural unemployment, and it can devote funds or resources to better matching job vacancies with the unemployed.
Overall, budgetary policy has the flexibility to focus on particular unemployment concerns, whether it is structural, cyclical, long-term or youth unemployment.
Each of the budgetary policy measures canvassed in relation to BP and economic growth will tend to stimulate AD and growth in real GDP and provide more macroeconomic benefits to national employment. With higher output levels, some businesses will eventually increase their demand for labour, resulting in higher employment levels and lower levels of unemployment. However, there are a number of other budgetary policy initiatives that could be introduced to directly increase employment or reduce the unemployment rate. These employ a more microeconomic focus and include measures like:
Many of the above measures help to increase the demand for labour by improving the skills of the unemployed, thereby helping to increase employment and reduce structural unemployment. Once re-skilled, these individuals are a more attractive employment proposition, helping to increase the demand for labour, boosting employment and reducing the rate of unemployment.
However, budgets can also be used to increase participation rates (or the supply of labour) in order to tackle the problems associated with skill shortages or an ageing population. This is likely to have a positive impact on employment over time. With a bigger labour supply, downward pressure is exerted on the price of labour (such as wages) and existing employees are likely to raise their work intensity in light of greater competition for jobs. With downward pressure on real unit labour costs, greater price discounting can occur, easing inflationary pressure and contributing to greater AD and real GDP. Accordingly, businesses are likely to increase their demand for labour, resulting in a higher level of employment and a lower level of unemployment over time.