How to Solve Unemployment

by Sujata Srinivasan; Updated September 26, 2017
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Let's face it, it's just not possible for every willing worker to find a job. The reason? Perhaps there are more people than there are job opportunities, perhaps jobs are being outsourced to reduce costs, or perhaps the economy is not growing at a robust pace. In any case, opinion differs on who should be responsible for creating jobs. The government or the private sector, or both? These are no easy answers.

Expansionary Fiscal Policy

Step 1

Proponents of Keynesian economics advocate that unemployment can be alleviated by government spending, referred to as an expansionary fiscal policy. Upon approval from Congress, the government increases its spending of taxpayer money with the goal of increasing the demand for labor, goods and services.

Step 2

Increased government spending or a stimulus package results in increased demand for production factors, primarily labor, required to create specific goods and services.

Step 3

This results in a temporary increase in output and a corresponding decrease in unemployment.

Step 4

When unemployment decreases, more people are able to buy goods and services, which in turn stimulates the economy and creates more employment opportunities.

Supply Side Economics

Step 1

While Keynesian economists aim to reduce unemployment by increasing consumer demand through higher government spending, proponents of supply side economics argue that employment opportunities are created by producers/suppliers. So the emphasis is on limited government and a strong private sector.

Step 2

Upon approval from Congress, the government lowers income taxes and a host of other taxes.

Step 3

Reducing taxes encourages producers to make more goods, investors to invest more money, and people to work more since they retain more of their earnings.

Free Market Policies

Step 1

Proponents of free market argue that the production and consumption of goods and services is a function of the private sector, not the government. Therefore the role of government does not include creating jobs.

Step 2

Minimal government results in a minimal regulatory environment, with no minimum wage laws and lower unemployment benefits.

Step 3

With less regulation, companies hire workers at a price attractive to them. With reduced unemployment benefits, more people re-enter the workforce earlier than they would have if the benefits were prolonged.

Warnings

  • Critics argue that an expansionary fiscal policy is only a Band-Aid type of solution; it doesn't fix the problem. To the contrary, it distorts the vital free market mechanism of demand, supply and prices

    According to an economic model called the "Philips curve," in the long-run, a society must choose a trade-off between unemployment and inflation. The higher the rate of employment, the higher the inflation.

About the Author

Sujata Srinivasan is a Connecticut-based freelance business journalist with over 10 years of reporting and editing experience. Key positions held include: Editor of Connecticut Business Magazine, Senior Financial Editor at Ness Technologies, and Correspondent and Interim Bureau Chief at CNBC-TV 18. She has a bachelor's degree in Business Management, a post-graduate diploma (hons) in journalism, and an M.A. in Economics.

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