Understanding Unemployment and Macroeconomic Policies

Types of Unemployment

Cyclical: Changes according to the economic cycle.

Seasonal: Caused by seasonal variations in demand. For example, employment in the tourism sector often increases during the summer.

Structural: Occurs due to a mismatch between available jobs and workers' skills, often caused by lack of access to education/training or shifts in industry demand.

Macroeconomic Policy Definition

Actions taken by governments to steer the economy towards specific goals by managing key economic indicators. This includes setting fiscal policy (taxation and public spending) and influencing the price level (often via interest rates set by the central bank).

Macroeconomic Policy Goals

1. Economic Growth (GDP)
2. Full Employment
3. Price Stability

Types of Macroeconomic Policies

1. Fiscal Policy: Actions involving government spending and taxation to influence the economy (expansionary or contractionary).
2. Monetary Policy: Actions by the central bank to manage the money supply and interest rates, aiming for price stability and economic growth.
3. Exchange Rate Policy: Manages the country's currency exchange rate relative to other currencies, affecting imports and exports.
4. Incomes Policy: Attempts to control inflation through direct measures on wages and prices (less common now).

Fiscal Policy Definition

Actions taken by government institutions involving taxation and public spending priorities to achieve governmental economic objectives.

• Expansive (or Expansionary) Policy: Lower taxes and/or higher public spending to stimulate the economy.
• Restrictive (or Contractionary) Policy: Higher taxes and/or lower public spending to slow down the economy.

Types of Fiscal Policies

Discretionary Fiscal Policies:

• Public Works Programs: Aim to boost GDP and employment while improving infrastructure.
• Employment and Training Plans: Help reintegrate people into the labor market.
• Transfer Programs: Provide aid to individuals and families in need (e.g., welfare).
• Tax Rate Modifications: Influence household consumption and business investment.

Automatic Stabilizers:

• Proportional Taxes: Tax rate remains constant regardless of income level.
• Progressive Taxes: Tax rate increases as income level rises.
• Social Security Contributions: Payments by workers and employers funding social benefits (e.g., pensions, healthcare), which can stabilize income.
• Unemployment Benefits: Provide income support to the unemployed, cushioning economic downturns.

National Budget Definition

The national budget outlines the government's planned revenues (income) and expenditures, detailing how fiscal policy tools will be implemented.

Public Income and Expenditure

Public Income (Revenue)

• Social Security Contributions: Payments by workers and companies funding social services.
• Taxes: Compulsory payments to the government. Includes direct taxes (levied on income or wealth, e.g., income tax) and indirect taxes (levied on goods and services, e.g., VAT).
• Fees and Charges: Payments for specific public services used (e.g., passport fees).
• Other Revenue: Includes transfers from other government levels, profits from state-owned enterprises, etc.

Public Expenditure (Spending)

• Current/Ordinary Expenses: Day-to-day operational spending (e.g., salaries, healthcare, education, defense).
• Capital/Investment Expenses: Spending on long-term assets (e.g., infrastructure development and maintenance).
• Transfer Payments: Redistributive payments without direct exchange for goods/services (e.g., unemployment benefits, pensions).
• Grants and Subsidies: Financial assistance to individuals or businesses to encourage specific activities (e.g., innovation, production).

State Budget Balance

• Balanced Budget: Public income equals public expenditure.
• Budget Surplus: Public income exceeds public expenditure.
• Budget Deficit: Public expenditure exceeds public income.

Types of Budget Deficit

• Cyclical Deficit: Occurs due to the economic cycle (increases during recessions, decreases during expansions).
• Structural Deficit: Persists even when the economy is at full potential, reflecting a long-term imbalance between spending and revenue.

Funding a Budget Deficit

• Issuing Public Debt: The government borrows money by selling bonds ('debt titles'), promising repayment with interest.
• Raising Taxes: Increasing tax revenue. May slow economic activity if implemented during weak periods.
• Money Creation (Monetizing Debt): The central bank effectively prints money to finance the deficit. Risks causing inflation.

Fiscal Policy: Keynesian vs. Neoliberal Views

Keynesian View

Keynesians believe that due to price rigidity, fluctuations in aggregate demand (consumption, investment, government spending) drive changes in output. Therefore, active government intervention (e.g., increased spending during downturns) can stabilize the economy.

Neoliberal View

Neoliberalism generally advocates for market-oriented reforms like deregulation, privatization, lower trade barriers, and reduced government spending (austerity) to promote economic efficiency, minimizing state intervention.