Reducing the unemployment rate in a country is one of the responsibilities of the local authorities to ensure that the people and producers of the country have sufficient resources. As we all know, unemployment can be caused by two sides, namely demand-side failures and supply-side failures. Therefore, there are two strategies used to address the problem of unemployment namely the demand-side policies, which is to reduce unemployment caused by recession, and the supply-side policies, to reduce structural unemployment.
Demand-Side Policies
The government, in its efforts, could control the economic recession and cyclical unemployment it caused by applying demand-side policies modelled by the Keynesian unemployment theory. The policy proposes that the government increase spending and lower taxes so that the people's disposable income increases. If income increases, then aggregate demand (AD) will increase. There are two ways under this policy: fiscal policy and monetary policy.
Fiscal Policy
Fiscal policy will be implemented if the government wants to increase aggregate demand and enhance overall economic growth. This policy involves cutting tax rates and increasing government spending. If the government does this, the disposable income of the people will increase and cause more consumption and demand. This will increase aggregate demand (AD) and subsequently increase real gross domestic product (GDP). If demand is high, manufacturers will produce and supply more and offer more jobs and thus reduce unemployment. Also, as aggregate demand increases, fewer bankruptcies will result in fewer people losing their jobs due to the productive economy.
However, this policy also has its disadvantages. This policy also depends on the willingness of the buyer to buy. Tax deductions will not increase AD if people prefer to save rather than spending for some reasons. Secondly, this policy provides for a long time to affect the AD increase. Also, inflation will occur if this step is implemented in a situation where the economy is almost fully capable because fiscal policy only works if there is an output gap. Lastly, in order to carry out this step, the government requires a lot of funds to borrow and this is not possible for countries with high debt levels.
Monetary Policy
Monetary policy will involves controlling and distribution of money in an economy where here it reduces the interest rates to promote loan-making. If interest rates on making loans are low, many people will be encouraged to borrow at lower costs and to spend more and invest more. Also, reducing interest rates can improve export competitiveness in order to raise the demand in the circular flow. All of this could lead to an increase in AD and in turn increases GDP, thus firms producing more and will in turn employ more workers and therefore, the unemployment rate will start to decline.
Monetary policy also has drawbacks, like fiscal policy, it depends on other AD components such as the willingness of buyers to spend and consume because household may borrow but not spending much. In addition, interest rate reductions cannot encourage AD increases if financial institutions such as banks find it difficult to provide loans, especially to lower income group, due to low interest rates returns.
Supply-Side Policies
The supply-side policy to improve employment issues focuses a lot on microeconomics aspects. This policy does not intend to improve AD, but focuses on labor market problems and solve them. Supply-side unemployment includes frictional, structural and classical. There are many policies used to address the issues of unemployment caused by supply-side.
Education and Training
Education and training schemes need to be focused on skills and qualifications that will enable the unemployed to find jobs in the new industry. This policy aims to reduce structural unemployment where it is caused by a mismatch between the workers’ skills and the ones needed by the employers. Through this, the government can fund training schemes in areas where there is a shortage of skilled workers. For example, if hospitals are lacking of nurses, the unemployed can undergo vocational training in the field of nursing for free. This will enhance the skills and marketability of the unemployed to meet the emerging labor market.
Despite that, there may be weaknesses by the government. For example, government departments may be slow to respond to changing market choices and subsidize training schemes that employers no longer need. Also, offering a training scheme will not necessarily have a high worker’s intake rate if the unemployed are unsure or unable to learn and acquire new training and skills as they are not sure of the benefits.
Employment Subsidies
Employment subsidies or hiring subsidies are steps taken to open up job opportunities by providing financial incentives to the private sector to hire long-term unemployed by reducing labor costs for firms. Labor costs can be reduced through subsidies to cover payroll. This led firms to hire more workers and in turn increase the employment rate. Also, the increasing demand for labor will encourage inactive workers to enter and fill the vacant workforce.
However, if these subsidies are only provided for a limited period of time, firms may only take advantage of this period and subsequently reduce the number of workers not long after the subsidies are withdrawn. This reduces the effectiveness of this measure over the long term. In addition, if this step were only given to the long-term unemployed to start working, the firm might act by replacing current workers with many more long-term unemployed to gain incentive benefits and reduce cost. Also, this measure requires a lot of funding and spending from the government and it could be a burden in the long run for the government’s debts.
Geographical Labor Mobility
The unemployment rate in some areas is higher than in others. This is also known as geographical unemployment where employment opportunities in their current location are limited and opportunities for them to migrate to areas of increasing employment are also constrained by the costly housing factor. Therefore, the government can take steps to provide and build affordable housing or provide financial assistance to the unemployed to relocate to labor-intensive areas. For example, the government of Malaysia has taken the initiative to address such unemployment by providing housing allowance to all public servants that varies in amount according to different area of stay to help them settle.
However, other factors also contribute to the geographic immobility, such as when workers are unable or unwilling to be relocated to new areas due to strong social and family ties where the unemployed cannot distance away from family and friends. Also, some parents do not want to interfere with their children's education with the need to change school setting. Moving to a new place can be a pressure for some people to adapt to new surroundings or even to be familiar with new cultures which can also be barriers to relocating the unemployed.
In conclusion, it should be noted that unemployment is a serious socio-economic problem that requires immediate action from the state to reduce its level.