Government Policies For Lowering Equilibrium Unemployment Economics Essay

In practice, there always is out there some level of unemployment even though the labor source and labor demand are in equilibrium and is known as equilibrium unemployment. Equilibrium unemployment is often positive and could be structural or frictional in aspect. The level of equilibrium unemployment is afflicted by those factors that have an effect on the simplicity with that your unemployed workers can be matched up with the available positions and the factors that have a tendency to increase income rates even though labor is excessively supply in the market.

These factors may include unemployment gain system, employment security laws, obstacles and limitations on movement of labor, high bargaining power of unions, high interest levels, and high labor fees. Lowering equilibrium unemployment takes a macro level work from the governmental level in conditions of policies that try to reduce structural and frictional unemployment.


The Keynesian theory assumes that there is a maximum GDP level that may be achieved at confirmed time and at that GDP level, you will see no unemployment however in practice, there always is out there some level of unemployment even at the equilibrium and is known as equilibrium unemployment (Sloman & Sutcliffe, 2006).

Equilibrium unemployment is actually positive and exists as a result of time take by new workers to find their first job, current workers to switch in one job to another (frictional unemployment) and due to a mismatch between structure of the work force in terms of their skills and the demand for labor (structural unemployment) (Lipsey & Chrystal, 2007).

The structural and frictional unemployment both donate to equilibrium unemployment which requires federal government action because of its reduction. The unemployed agents in the economy have the choice to pick between accepting career and carrying on their search until they find a suitable employment (Gomesa, Greenwood & Rebelo, 2001). Also known as the natural rate of unemployment, the happening can be discussed by using the next graph

http://www. economicshelp. org/images/macro/Natural-rate-unemployment. jpg

Figure : Equilibrium Unemployment

ASL is the labor resource; ADL is the demand for labor while N is the total work force. The difference between the labor force and labor resource, displayed by the red line is the speed of unemployment or the equilibrium unemployment.

Determinants of Equilibrium Unemployment

The degree of equilibrium unemployment is influenced by those factors that impact the simplicity with which the unemployed staff can be matched with the available positions and the factors that tend to increase income rates even though labor is in excess supply in the market (Layard, Nickell & Jackman, 2005).

According to this criterion, the factors that will immediately have an impact on the equilibrium unemployment rate include the unemployment advantage system, In the event the power system provides coverage for years and is distributed reasonably, employees may lose their willingness to find employment.

Another factor is job protection laws, in the event these laws and regulations are demanding, the firms is quite cautious and sluggish in filling vacancies and therefore the procedure of finding job becomes much longer. However these regulations also have a good impact in reducing equilibrium unemployment because they lessen voluntary separations from jobs.

At times, there are obstacles and limitations on movement of labor in one region or job to another. As these limitations make it more difficult to match unemployed with vacancies, they add to the increase in equilibrium unemployment.

High bargaining electricity of unions in negotiating income rates can drive the wage rates up-wards and produce a mismatch between skill level and the compensation. Because of this, firms may hire fewer employees and increase equilibrium unemployment. High interest rates could also inhibit organizations to increase while also restricting future investment therefore minimizing job leads and increasing equilibrium unemployment.

Some other factors which could contribute to equilibrium unemployment will be the labor market policies of the government, real wage level of resistance and high labour fees.

Government Policies

As visible from the above talk, minimizing equilibrium unemployment takes a macro level effort from the governmental level in conditions of regulations that make an effort to reduce structural and frictional unemployment. One policy that helps reduce equilibrium unemployment is to encourage the personnel and work force to adjust to change.

In this way employees continuously up grade their skill set and there is a movement of personnel across industries, areas and occupations depending on demand for labor. In the same way, subsidies can be offered to firms setting up their businesses in areas where unemployment is high. This approach directly focuses on the structural unemployment and is designed to reduce the mismatch between your framework and demand for labor, this insurance policy was quite successful in Sweden (Lipsey & Chrystal, 2007).

In addition to this, in order to keep the unemployed from becoming complacent and becoming reliant on unemployment benefits, these benefits for the unemployed can be reduced while giving more benefits for those who have a low paying job or have just recently gotten employment. To be able to target frictional unemployment, the government has to reduce the time taken to visit a job.

The authorities can set up position facilities that maintain a repository of workers and their skill models and the vacancies available and helps people find jobs according to their skills and requirements and help the unemployed to find temporary jobs till they find the right position (Miller, 1994).

Similarly, artificially high income rates have to be treated as well, the government must arbitrate the protection under the law of the firm versus the rights of the workers and one get together shouldn't be able to exploit the other through stricter legislation for unions.

The federal can also offer lower interest levels in areas stricken with high level of unemployment so that investment thrives for the reason that area and new companies are create, increasing employment opportunities for the unemployed. The federal government can also explain income rates for various skill level and categories, making negotiations by unions to artificially increase wages by the unions meaningless.

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