Monday, April 6, 2009

Dealing With Unemployment

The scale of the recession means that unemployment is forecast to increase to 3 million. What, if anything, can be done to limit the rise in unemployment?
  • Subsidise Declining industries. Car industries have been calling for government support to stay open. The justification for subsidising industries is that it protects jobs. However, this is an expensive way to protect jobs. It is also difficult for the government to decide which industries / firms to save - the government may end up saving inefficient firms in an overcrowded industry. There may be a case for helping with finance, but loans should be competitive. (more: should government subsidise declining industries)
  • Creating Public Sector jobs e.g. construction, litter collection. There are many jobs that the government could create temporarily during the recession. Last year the government built 300 council houses. Building new homes by employing unemployed construction workers could deal with a public service issue as well as create employment. Expensive to create any significant number of jobs, but government would at least save unemployment benefits
  • Increase Aggregate Demand. Arguably the most effective strategy for the government is to increase aggregate demand and allow market forces to create real jobs (as opposed to 'artificial' government sector jobs) The problem is after cutting interest rates, a large fiscal boost, depreciation in Pound and quantitative easing there isn't much else the government can do. There is an element of waiting hoping that the policies will work.
  • Supply Side Policies. These are policies to deal with microeconomic imbalances. For example, education and training to help the long term unemployed find jobs in growing areas of the economy. Although one feature of this recession is that well education workers are losing their jobs just as much as the unskilled.
  • Flexible labour markets to encourage firms to take on workers. Although UK labour markets are already flexible
  • Better information.
There are long term policies and won't deal with the current crisis.

However, they may be important for the speed by which unemployment falls. After the 1981 recession, unemployment remained high for a long time. After the 1991 recession, unemployment fell much quicker.

In addition to the demand side policies, I would have liked to see the government create more public sector jobs. It is a great shame, public borrowing for this year is already hitting 11% of GDP. If we had kept reducing borrowing in the boom years, we would have had more room for this policy which would definitely have helped cushion the blow.

The unfortunate truth is that there is very little we can do to prevent unemployment rising. But, we can limit the extent of the recession, we can speed recovery and we can target spending to most effectively deal with the rise in unemployment

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