Revision NotesExam QuestionsFlashcardsPast Papers
IGCSEEconomicsCambridge (CIE)Revision Notes4. Government & the Macroeconomy4.6 Employment & UnemploymentPolicies Used To Reduce Unemployment

Syllabus Edition

First teaching 2025

First exams 2027

Policies Used To Reduce Unemployment (Cambridge (CIE) IGCSE Economics): Revision Note

Exam code: 0455 & 0987

Steve Vorster

Written by: Steve Vorster

Reviewed by: Lisa Eades

Updated on

Demand and supply-side solutions

  • Demand-side unemployment is caused by a lack of total demand in the economy and this is often related to a recession in the economic cycle

  • Frictional, seasonal and structural unemployment emerge from factors affecting the supply side of the economy 

  • The appropriate government interventions to alleviate different types of unemployment depend on whether they stem from demand-side or supply-side factors

Type of policy to use for each cause of unemployment

Flowchart showing types of unemployment matched to policies: Structural, Seasonal, Frictional to Supply-side policy; Cyclical to Demand-side policy.

Examiner Tips and Tricks

Always link the policy to the type of unemployment in the question. For example:

  • Cyclical unemployment → demand-side policies work best

  • Structural unemployment → supply-side policies are more effective

Demand-side policies

  • Expansionary fiscal policy and expansionary monetary policy aim to increase total (aggregate) demand in an economy

    • The demand for labour is derived from the demand for goods/services

    • If total demand for goods and service increases there will be a higher demand for labour, leading to lower unemployment 

  • Total demand can be increased through any policy which increases one of the components of real gross domestic product (rGDP)

Examples of demand-side policies to reduce unemployment

Broad policy type

Specific policy

Explanation

Expansionary fiscal policy

  • The government decreases corporation tax

  • Firms pay less tax → firms have more profit → firms hire more workers → firms increase output → unemployment falls

Expansionary fiscal policy

  • The government increases expenditure on national defence

  • Defence firms receive more orders from the government → they hire more workers to produce the output → unemployment falls

Expansionary fiscal policy

  • The government decreases personal income tax

  • Households have more discretionary income → consumption increases → in order to produce the extra goods/services, firms hire more workers → unemployment falls

Expansionary monetary policy

  • The Central Bank lowers interest rates

  • Household repayments on existing loans fall → Households have more discretionary income → consumption increases → in order to produce the extra goods/services, firms hire more workers → unemployment falls

How effective are demand-side policies?

  • Demand-side policies are very effective at dealing with unemployment caused by a fall in total (aggregate) demand

  • They are not effective at dealing with frictional and structural unemployment

  • One conflict caused by expansionary policy is that demand-pull inflation is likely to occur

  • Expansionary monetary policy tends to increase inequality in the distribution of income, as the poor are usually unable to benefit from it (banks do not necessarily lend to the poorest households)

Supply-side policies

  • Supply-side policies aim to improve the quantity and/or the quality of the factors of production, thereby raising potential output

    • If output increases then firms will require more workers to produce that output and unemployment may fall

Examples of supply-side policies used to reduce unemployment

Specific supply-side policy

Explanation

The government reduces trade union power

  • Trade union power weakens → firms lower wages → costs of production decrease → firms can produce more output with the same input → firms hire more workers as they are cheaper → unemployment falls

The government reduces regulation on the oil and banking industries

  • Regulations removed → costs of production decrease as firms no longer need to spend money meeting requirements → firms can produce more output with the same input → firms hire more workers as they are cheaper → unemployment falls

The government introduces new long term training subsidies for students of green technology

  • Cheaper to study green technology → more students develop their skills → supply of skilled workers in the industry grows → new firms launch → output increases and more workers are required → unemployment falls

Effectiveness of supply-side policies

  • Supply-side policy tends to be long-term

    • E.g. reducing trade union power is a long-term process, as is training

  • It is most effective in dealing with unemployment caused by frictional and structural unemployment

  • It does not help deal with unemployment caused by demand-side issues e.g. a recession

Unlock more, it's free!

Join the 100,000+ Students that ❤️ Save My Exams

the (exam) results speak for themselves:

    Test yourselfFlashcards
    Previous:The Types & Consequences of UnemploymentNext:Measuring Inflation
    Author
    Reviewer
    Steve Vorster

    Author: Steve Vorster

    Expertise: Economics & Business Subject Lead

    Steve has taught A Level, GCSE, IGCSE Business and Economics - as well as IBDP Economics and Business Management. He is an IBDP Examiner and IGCSE textbook author. His students regularly achieve 90-100% in their final exams. Steve has been the Assistant Head of Sixth Form for a school in Devon, and Head of Economics at the world's largest International school in Singapore. He loves to create resources which speed up student learning and are easily accessible by all.

    Lisa Eades

    Reviewer: Lisa Eades

    Expertise: Business Content Creator

    Lisa has taught A Level, GCSE, BTEC and IBDP Business for over 20 years and is a senior Examiner for Edexcel. Lisa has been a successful Head of Department in Kent and has offered private Business tuition to students across the UK. Lisa loves to create imaginative and accessible resources which engage learners and build their passion for the subject.