Cyclical and structural unemployment are the most common types of unemployment.
Explain the causes of these types of unemployment and assess the effectiveness of government policies to reduce them.[25]

Cambridge a level june 2019

Economists identify several different types of unemployment and all according to their differing causes.


STRUCTUTAL UNEMPLOYMENT


Structural unemployment is one of such type that arises from changes in the pattern of demand or supply in the economy.
People made redundant in one part of the economy due to a long run decline of demand in particular industries cannot immediately take up jobs in other parts of other industries.
Hence, structural unemployment exists where there is a mismatch between their skills and the requirements of the new job opportunities.



CAUSES OF STRUCTURAL UNEMPLOYMENT


Economists reckon two main causes of structural unemployment.
Firstly, it occurs where the structure of the economy changes.
Employment in some industries experience declining demand.
This may be due to a change in consumer tastes as certain goods go out of fashion.
Or it may be due to competition from other industries.
For example, consumer demand may shift away from coal and to other fuels.
This will lead to structural unemployment in mining areas.
Secondly, new techniques of production often allow the same level of output to be produced with fewer workers.
This is known as ’labour-saving technical progress'.
Unless output expands sufficiently to absorb the surplus labour, people will be made redundant.
This creates technological unemployment.
An example is the job losses in the banking industry caused by the increase in the number of cash machines and by the development of telephone and Internet banking.



POLICIES TO TACKLE STRUCTURAL UNEMPLOYMENT



Structural unemployment can be addressed mainly by supply-side policies.
Of demand-side policies, monetary policy is ineffective in dealing with it while fiscal policy, as a stabilisation tool, is also ineffective.
One of the objectives of supply-side policies is to reduce structural unemployment by enabling workers to acquire the skills, training and retraining necessary to meet the needs ot employers.
This can be achieved by setting up retraining programmes; support for retraining through grants and low interest loans; direct government hiring and provision of on-the-job training; grants to firms offering on-the-job training; subsidies to firms hiring structurally unemployed workers.
In addition, providing assistance to workers to relocate can also help.
Measures include grants and subsidies to assist relocation and information on job availability in various geographical areas along with government projects in the depressed areas for employment creation.
However, most of these supply-side measures work after significant time lags, making their effects on unemployment over the longer term.
This is because the activities set into motion need time to materialize.
Moreover, they can have an effect on aggregate demand over the short term.
Therefore, in a recession, such policies could have the added advantage that they can help close a recessionary gap.
Yet, if an economy is experiencing inflation, they could contribute to destabilizing the economy by adding to inflationary pressures.



CYCLICAL UNEMPLOYMENT



Cyclical unemployment is the other most common type.
It is involuntary unemployment that results from a lack of aggregate demand for goods and services.
This is also known as Keynesian "demand deficient" unemployment and is associated with the transition of an economy through the business cycle.
When there is an economic recession we expect to see a rising level of unemployment because of plant closures and worker lay-offs.
This is due to a fall in demand leading to a contraction in output across many industries.
Although demand deficient unemployment is usually associated with economic recessions it can also exist in the long run when the economy is constantly run below capacity.
As the economy recovers from a downturn, we expect to see the problem of cyclical unemployment decline.
Labour, after all, is a derived demand, derived from the demand for the good that is being produced.
So, if there is a fall in the demand for products in the goods market, the demand for labour will fall causing unemployment.

MWASURES TO CORRECT CYCLICAL UNEMPLOYMENT


Since cyclical unemployment is caused by low or falling aggregate demand, therefore measures to correct it involve expansionary demand-side policies that is fiscal and monetary' policies.
An expansionary fiscal policy involves raising government expenditure and/or lowering taxes.
This will have the effect of cither increasing the budget deficit or reducing the budget surplus.
It is where the government alters the balance between government expenditure (G) and taxation (t), and thereby alters the balance between injections and withdrawals with a view to increase aggregate demand.

On the monetary side, various quantitative and qualitative tools can be used to increase the money supply and/or lower interest rate.
This will boost consumer expenditure and business investments.
Central bank, for instance, can lower its lending rate, buy up government securities and relax regulations on reserve ratios and special deposits.
All these measures will increase money supply and lower interest rate and hence they are expected to boost consumer and investment expenditures leading to a rise in aggregate demand.


EFFECTIVENESS OF POLICIES TO CORRECT CYCLICAL UNEMPLOYMENT


So far as fiscal measures are concerned their direct impact on AD is believed to be more effective in pulling an economy out of deep recession, which is also likely to involve a high rate of cyclical unemployment.
Fiscal policy, however, is subject to time lags.
For instance, by the time the policy action has taken effect the problem may have become less or more severe, so that the policy action is no longer the most appropriate one.
Also, government spending and taxation face numerous pressures that are unrelated to fiscal policy.
Moreover, increased government spending without an increase in revenues increases public sector borrowing that involves an increase in the demand for money, and leads to an increase in the rate of interest.
A higher interest rate in turn can lead to lower investment spending by private firms, or a 'crowding out' of private investment.
This means that the government's expansionary fiscal policy is weakened.
Unlike fiscal policy, monetary policy can be implemented and changed according to perceived needs relatively quickly, because it does not depend on the political process.
Moreover, monetary policy avoids crowding out which leads to lower interest rates.
Also, interest rates can be adjusted in very small steps, making monetary policy better suited to 'fine tuning’ of the economy in comparison with fiscal policy.
However, like fiscal policy, it remains subject to time lags, including a lag until the problem is recognised, and a lag until the policy takes effect.
For instance, changes in interest rates can take several months to have an impact on aggregate demand, real output and the price level.
Moreover, a recession and cyclical unemployment require lower interest rates, but this may lower the exchange rate, which may result in imported inflation.
Lastly, an expansionary monetary policy presupposes that banks will be willing to increase their lending to firms and consumers, and that firms and consumers will be willing to increase their borrowing and their spending.
However, in a severe recession, banks may be unwilling to increase their lending, because they may fear that the borrowers might be unable to repay.
Hence, structural unemployment is reduced by using supply side measures while demand side policies are more effective in dealing with cyclical unemployment.