Solutions for Reducing Unemployment

Demand-side policies affect the aggregate demand of the market. These policies aim to increase consumer expenditure in order to stimulate the market.

For example, let's take a look at demand-deficient or cyclical unemployment. In the graph of demand-deficient unemployment, the aggregate demand falls from DL1 to DL2. This fall in demand almost always ensues the income fall. Because supply of labor stays constant, L2-L1 amount of unemployment occurs. Before the demand fall, there was L1 amount of employees working at a wage of W1. But now, there are L3 amount of people working at a wage of W2 (less employed people in less wage). 

The government is likely to intervene and pull up the aggregate demand back to where it was, to restore minimum wage for the employees and re-increase the employment from L3 to L1. The government might do this by reducing tax or interest rates thus leaving a room in households to spend in other things.

Supply-side policies affect the aggregate supply of the market. These policies aim to increase the number of qualified labor thus make employers to hire more people. Supply-side pertains to long-term solution.

Recall Willie from the stories you've read below. Willie's company broke because its products were out of date, and Willie couldn't be hired to any other technology companies because his technology skills were now obsolete. The companies that produces high technology products were suffering too, because they couldn't get people who had adequate skills and knowledge to apply to new products. 

Here, the government can intervene and provide educations to people who are willing to be qualified - the government can offer free job trainings and prepare the unemployed people to get another job. This would of course take longer time than demand-side policies, but it is necessary to benefit both the unemployed people and the company that is willing to hire qualified people.

Five Stories of the Unemployed

Real-wage Unemployment

Meet James. James lives in Michigan and he's worked as a delivery man in a pizza chain for over a year now. Although the wage is very low, he is satisfied with his job, because he thought he will never get a job after quitting highschool. James is diligent - he never gets late to his work and he never delays his delivery service. The company that's hiring him pays him $5 per hour, which is the minimum wage the government assigned. If he worked 8 hours a day, he could earn $40.

But one day, James gets a call from his boss, Tom. Tom says "I'm sorry, James, but we are not hiring you anymore". Baffled, James asked. "What?! Why? Did I do something wrong?" "No, but the government has increased the minimum wage. We have to pay you $8 per hour, and we can't afford that". James was angry and upset. He asked, "You really don't have to raise my wage, just let me work he here please." Tom, sighs and says "I'm sorry but we can't. That's illegal. We are cutting off some of the men we'd got, sorry. You don't have any family that you're responsible for. Find another job."

James got fired because the government raised the minimum wage. The company couldn't hire him anymore because hiring him would be "too expensive". Number of workers are the same, but the demand of the workers now fell, which led to unemployment.

Demand-deficient (Cyclical) Unemployment

Julia is a music teacher. She doesn't teach in school - she does private lessons. She has many students whom she teaches violin to. She earns $2000 a month, as each student pays $200 for her private lesson and she teaches 10 students. 

But now the Great Depression hits America. The students' parents are trying to reduce the household expenditure as much as possible. Well, they decide they can't cut down money for food, electricity fees, or etc. They have a better idea - my kid doesn't need violin lessons anymore!

Kids start to quit the lesson. They say it's too expensive to afford the lesson at their current wallet situation. Julia says okay, but she's so depressed because now she can do nothing to earn money. She is now jobless and is unemployed. 

Julia was unemployed because the aggregate demand of violin lessons has fall. The demand has fall because the kids had no money to spend on the expensive violin lessons. 

Frictional Unemployment

Tommy is a diligent boy who works as a cook in a small restaurant in Birmingham. He is generally satisfied in his job which pays him $2000 monthly. But he thinks maybe he could get higher salary, since he toils in the kitchen alone with no one else helping him. But he never tells it to his employer because he's afraid he could get fired.

One customer comes and orders a grilled chicken and a steak. Tommy, cooks the food and the waiter serves the food. Later, Tommy receives a namecard from the customer. Tommy doesn't know why the customer gave him that card. After he got back from work, Tommy calls the customer.

"Umm... I got your card today, I'm the cook in the restaurant." Tommy says. "Oh, yes. Thank you for calling me." The man responds. "Why did you want to talk to me?" Tommy asked. "Oh, in fact... Would you mind working for our new grand restaurant in the hotel? I tasted your food today and it was good enough. I offer you a job with $4000 monthly." 

Tommy, after the phone call, thinks for two seconds and decides to move to a new job. He calls his employer and tells him he can't work anymore. His employer is dumbfounded, but accepts it. But later Tommy gets another call from the hotel-man. "Hey, I forgot to say this - the hotel construction is going to be completed in two months. I will contact you in mid November for the contract, so be ready."

Now Tommy is unemployed because he's trying to shift to a new job. Tommy has quit from his initial job, and was planning to get into a better job - but that job is only available after two months. During the two months, Tommy stays unemployed because he is in the transition stage where he is trying to work in a better place.

Seasonal Unemployment

Haruka is a girl who has her icecream stand around downtown. During summer, she finds her business extremely profitable. She earned about $120 a day, after subtracting the initial capital investment. She is so happy and now she dreams to continue her icecream stand and become rich. 

It's fall. It's getting cold. Her customers now just passes by. If 300 people bought her icecream during hot summer day, now only 70 people buys her icecream. She doesn't now if she has to close her icecream stand, but since there are some customers, she decides to leave it open. Indeed, there's nothing else for her to do.

It's winter. It's really cold. Now no one is buying an icecream from Haruka's icecream stand, but now they buy hot chocolate from the hotchoco stand next to Haruka's. Haruka decides to close the stand, since no one buys her icecream.

Haruka had to close her icecream stand because the "season" made her products useless. During burning summer day, many people needed icecream, but now the demand has fall and no one's coming to Haruka's icecream stand. Haruka is unemployed because of the season - she can open her icecream stand next summer or think of another business such as selling hot chocolates. 

Structural Unemployment

Willie is working in a company that produces typewriters. His monthly salary is $2000. He studied technology at school. He works as an engineer. The company earns quite lots of money during the first era of typewriters. The company is satisfied - they don't hire any people to develop further technology, but they concentrate in producing the current level of typewriters. Willie is little bit worried about that, so he often walked to the CEO to suggest investment in new technology. But the CEO never listen to him, so Willie just decides to zip his mouth. 

One year later, the Microsoft and many other companies simultaneously started bringing out newer version of typewriters, and furthermore, something what's now called "computers". People now threw away their typewriters, and got fascinated by computers that has new features - monitors and mouse and many other software that are used more usefully and frequently rather than typing.

Now the company where Willie's working for is crippling - its revenue has fallen by 300% and it couldn't pay its money loans for the bank and of course the workers were not getting their money by the end of the month. The company just kept falling into nadir and finally the company broke, making every single employees of the company unemployed - of course including Willie.

Willie is now unemployed because his knowledge for typewriter technology is obsolete and useless - new technology has made him jobless. If he wants to work, he now has to learn some computer related skills to follow the trend.

Response to Obama's Stimulus Plan

Unfinished!!!


President Obama has two ways in reducing unemployment rate. One way is to reduce tax - to cut down the payroll tax. Another way is to spend money in national projects, for example, and benefit both the nation and the unemployed people.

I'll focus on the spendings that Obama is planning. He specified several places to spend - infrastructure bank, immediate surface transportation, modernizing schools/vacant property, extending unemployment benefits, help for long-term unemployed, subsidizing jobs training, and keeping teaching and first responder jobs.

What to do:  Explain the proposed stimulus plan which President Obama is trying to have passed into law.  In your post, provide specific details of the plan and explain how these ideas are designed to affect the unemployment rate.  Finally, provide your own evaluation of the plan and explain any positive or negative aspects as you see them (keeping in mind what you have learned about economics).

In your post, please include two pictures and provide a link to the article under review.

Short Overview :)

I began studying Economics about one year ago as I started the IB Diploma. IB Econ was one of the six IB subjects, and the only subject that I was sure I would do in HL. I wanted to learn Economics because I always wanted to understand the stock market, and after I knew about it, I wanted to learn more about Economics. I think every students should study economics in order to understand the world and how money circulates the world. I mean, everything comes to money in the end, isn't it? (although the definition of economics is not "money"... it's all about it!)