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Policies to Reduce Unemployment

Updated on October 8, 2013

High unemployment rate is one of the biggest problems for any economy. No economy can grow properly, if a significant number of people are out of work. A high unemployment rate brings the biggest damage for any developing economy, because of the reason that the economy always operates below its Production Possibility Frontier (PPF). These are the amounts of lost goods and services that are never recovered.

There are many other disadvantages, too, which you can read in the following article in detail:


Two Major Strategies to Reduce Unemployment:

Two major strategies or policies to reduce unemployment are to:

  • Increase the aggregate demand
  • Work on the supply side factors

In light of all these costs, disadvantages and damages, it becomes imperative to reduce unemployment. Although it is a tough ask for any economy, and it requires a lot of patience and efforts, but reducing unemployment is always one of the biggest priorities for any country. There are various policies to reduce unemployment, but they all revolve around the efforts for increasing aggregate demand in the economy. Following are some of the most common and effective policies to achieve that goal:


1. Increased Government Expenditure:

The government can raise the level of its own spending. By spending on capital projects, which add to the stock of capital, or by increasing aggregate demand, a platform for more jobs is created in the economy. Increasing the aggregate demand in an economy is the most reliable and productive method of tackling the high unemployment rate.

2. Lower Taxation:

Another policy to reduce unemployment is to lower the taxation rates in the economy. A reduction in taxation increases consumer’s disposal income available for consumption. As consumption increases, the overall demand of different commodities is also increased. And in order to match that increased demand, more labor is required.

3. Lower Interest Rates:

Like lower tax rates, lowering interest rates is another effective policy to reduce unemployment in a country. When interest rates are decreased, savings also decrease. This, in return, increases a consumer’s income available for consumption, which ultimately boosts up consumption and demand in the economy. Eventually, more labors are hired to fulfil that increased demand.

Moreover, another aspect of reducing unemployment by lowering interest rates is that this technique also encourages other firms, businesses and organizations to invest in the economy. As the interest rates are reasonably lower, the marginal cost of investment falls. This becomes a good enough incentive for companies and businesses to invest in the country. And as always, investment significantly reduces the unemployment rate in a country.

4. Regional Policy Incentives:

This technique is basically related with the supply side factors. In this technique, the government gives grants and subsidies to firms to locate in areas of high unemployment. Often regional policy requires extra retaining schemes to give workers the relevant skills to allow them to take up new jobs. This helps in solving the problem of occupational immobility.

5. Improving Geographical Mobility of Labor:

The government could provide grants or low-cost housing schemes to encourage workers to move to other regions, where there are jobs available. This reduces the problem of structural unemployment.

6. Improvement in Job Information:

Better information on job vacancies among the labor force can significantly curtail the level of unemployment in an economy. If there is proper awareness about job vacancies, unemployment rate is supposed to be decreased. Therefore, improving awareness regarding job information is always an effective policy to reduce unemployment.

7. Improving Flexibility in the Labor Market:

Improving flexibility in the labor market is another technique which can be used to reduce unemployment. However, its implementation involves a bit of a risk, too. Providing more flexibility in terms of hiring and firing workers, and increased shifts or maximum working hours can help reducing unemployment. However, on the other hand, this technique also creates more uncertainty and insecurity in the economy, so it must be applied carefully and wisely.


Unemployment has always been a major issue for many economies. And in the time of recession, it becomes an even signified problem. However, by working on increasing the aggregate demand – through increasing government expenditure, encouraging investment and lowering taxation and interest rates – the government can create the need of employing more labor. On the other hand, by working on the supply side factors, like, improving geographical mobility of labor, occupational mobility of labor and flexibility in the labor force, the problem of high unemployment can be certainly be controlled.

Related Articles on Unemployment:

Learn about all the different types of unemployment. These types include Cyclical Unemployment, Frictional Unemployment and Structure Unemployment.

There are several costs of unemployment for an economy. This article not only includes the costs of unemployment to the unemployed, but it also discusses about the social costs of unemployment, fiscal costs of unemployment and costs of unemployment to the economy.


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    • wmhoward4 profile image

      William A. Howard IV 

      7 years ago from Baltimore Maryland (USA)

      The problem with many of the above options is the level of debt service (22+%) Politically, pressure is applied to grant transfer payments that people spend on foreign goods.

      Our policy makers must set energy producers and manufacturers more free to produce goods and energy here to expand hiring. Given the "green-hate" movement and its war on American industry, we would be hard pressed to see anything done.

    • Deborah Brooks profile image

      Deborah Brooks Langford 

      7 years ago from Brownsville,TX

      Excellent thoughts in this hub.. great information.

      Thank you for sharing an informative hub



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