Equilibrium unemployment is unemployment caused despite the fact that there are people in the labor force and is normally blamed due to the lack of supply of labor. This type of unemployment can be structural, seasonal or frictional. Structural unemployment is when due to occupational or geographic immobility people don’t have the skills or the ability to move to a place where the type of labor they can offer is demanded. Seasonal unemployment is when an industry only operates during a restricted season for example tourism and frictional unemployment is caused due to the fact that people seek better jobs. The problem of equilibrium unemployment is illustrated in the graph below.
This form of unemployment isn’t bad for the economy since it isn’t particularly hard to combat and considering the fact that it is anticipated an economy will have some form of unemployment. However the government should still pursue policies to combat it. The best policy for the government to pursue would be a supply side policy which aims at improving the quality and the quantity of the factors of production namely land, labor, capital and entrepreneurship. The government could improve labor in this situation by using several techniques. For example it could educate people in school or university about jobs they could pursue so as to eliminate frictional unemployment. In order to eliminate seasonal unemployment the government could increase the period of a person’s employment, for instance they could increase the length of the tourism period. Finally in order to eliminate structural unemployment it could improve transport so as to eliminate geographic immobility and it could improve people’s education s o as to decrease occupational immobility. The above ways are methods of improving labor as a factor of production and consequently reducing unemployment which is very effective however it takes a long time to show results. The result of this is illustrated in the following diagram.
As seen in the figure the pursued supply side police reduced unemployment however it reduced wages at the same time which is why labor unions may disapprove of such policies.
The other type of unemployment is disequilibrium unemployment which is unemployment occurring due to lack of demand for labor. This is why it is also called demand deficient or cyclical unemployment. In order to reduce this type of unemployment demand side policies are more effective because they tackle the problem at its root this being the lack of demand. The result of imposing a demand side policy, are seen in the following diagram.
As seen in the above figure a demand side policy will lead to an expansion of demand from LD1 to LD will lead the existing unemployment to be eliminated. This will be achieved either through a fiscal demand-side policy (affects taxes and government spending) or through a monetary demand-side policy (affects interest rates and supply of money). The monetary policy would decrease interest rates and increase the supply of money as a result more people would have more spending money which according to the marginal propensity to consume would be allocated to domestic consumption. This as a result would mean an increase in aggregate demand; however government spending and exports would also have to increase. This increase in aggregate demand will mean that there will be an increase in the need for labor because more will have to be produced which will reduce unemployment. The fiscal policy would increase government spending and decrease taxation so as to increase the money people will have which again accordi ng to the marginal propensity to consume will be allocated in the economy thus increasing aggregate demand which will in turn lead to a decrease in unemployment.
From the above we conclude that demand side policies are better used when we are facing disequilibrium unemployment.