Unemployment: Causes and Cures

In Chapter 9, Section 9.3 we discussed the nature and measurement of unemployment, together with its economic, social and political costs. While there is a general consensus that the maintenance of a high and stable level of employment is an important objective of macroeconomic policy, there is considerable controversy over why unemployment exists and what governments can do to reduce it. This chapter looks at the debate over the causes of, and cures for, unemployment. At the outset it is worth emphasizing that the central question that underlies this continuing debate is whether the cause of unemployment is largely to be found inside or outside the labour market. If unemployment is essentially due to imperfections in the labour market, then government policy to reduce unemployment needs to be directed to alleviate such imperfections. If the cause of unemployment is largely to be found outside the labour market — because of insufficient spending in the goods market — then government policy needs to be directed to stimulate aggregate demand in the economy.