Learning Outcome 5d, 5f, -Business Cycle, Economic growth; QUESTION 8 18 MARKS Discussion at the economic symposium in Jackson Hole (2012) centred on the extent to which unemployment is a structural or cyclical problem. Federal Reserve Chairman Bernanke and Professor Lazear of Stanford were among those who argued the latter, while Richmond Federal Reserve President Lacker and Professor Gordon of Northwester University were amongst those who argued the former. ACTION REQUIRED Unemployment can be due to structural factors or cyclical factors. Provide a brief outline of what this means i.e. a) What is structural unemployment; (2 marks) b) What is cyclical unemployment; (2 marks) c) For both structural unemployment (2 marks) and cyclical unemployment (2 marks) briefly outline (state and explain) one policy/leconomic/financial action available to the Govenment, including Monetary Policy, that may reduce that form of unemployment Note: for the purpose of this question assume that Monetary Policy is under the direct control of the Government. d) Provide a brief explanation of the linkage between structural and cyclical unemployment and economic growth. e) In part c) above you identified policy action that a government could take to tackle structural and cyclica 4 marks) 4 marks) unemployment. Briefly explain the fiscal and economic consequences of implementing your policies. 4 marks) Between structural and cyclical unemployment which should a government give priority to? Give one reason to justify your choice. f) 2 marks)
a) Structural unemployment : It results from structural reorganization of industries , technological changes , skill mismatch in the economy .
b) Cyclical unemployment : It is a component of the business cycle that occurs in the economy . It is a factor of overall unemployment that relates to the cyclical trends in growth .
c) Structural unemployment : policies that can be followed are expansionary fiscal or monetary policy or government expenditure on training and education of eradicate skill mismatch . More supply of money in the economy helps people to afford better training and cope up with the advance technological changes in industries .
Cyclical unemployment : Government spending in setting up of public sector units , government investment etc helps to generate employment during periods of recession . Government expenditure spending increases aggregate demand , this boosts economic growth and hence reduces unemployment .
d) Natural unemployment = frictional + structural unemployment . Actual unemployment = natural + cyclical unemployment . When there is economic growth , the economy is upward rising , hence cyclical unemployment falls . There is prosperity in the economy and hence people have more purchasing power . So people can afford better training and education . so structural unemployment is also expected to fall .
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