IGCSE Economics – Government Macro‑economic Intervention: Full Employment
Government Macro‑economic Intervention
Objective: Achieving Full Employment / Low Unemployment
Full employment is the situation where the economy operates at the level of output at which cyclical unemployment is zero. In practice, a small amount of frictional and structural unemployment is accepted, so the aim is to keep unemployment as low as possible without causing inflationary pressure.
Why Full Employment Matters
Reduces waste of labour resources and increases national income.
Low unemployment lowers the cost of living (less pressure on wages).
Improves social stability and reduces government spending on benefits.
Creates a larger tax base, enabling further public investment.
Measuring Unemployment
The most common indicator is the unemployment rate:
\$\text{Unemployment Rate} = \frac{\text{Number of unemployed people}}{\text{Labour force}} \times 100\$
Other useful measures include:
Under‑employment rate – people working part‑time but wanting full‑time work.
Long‑term unemployment – those unemployed for 12 months or more.
Causes of Unemployment
Type of Unemployment
Primary Cause
Typical Policy Response
Frictional
Job search and matching process
Job‑centre services, training programmes
Structural
Mismatch of skills or geographic location
Education reform, relocation incentives
Cyclical
Insufficient aggregate demand
Expansionary fiscal/monetary policy
Classical (real‑wage)
Wages above equilibrium
Supply‑side reforms, wage flexibility
Government Tools to Promote Full Employment
Demand‑side Policies
Target the level of aggregate demand (AD) to close the output gap.
Expansionary fiscal policy
Increase government spending (G) or cut taxes (T).
Effect on AD: \$AD = C + I + G + (X-M)\$ – a rise in G or a fall in T raises AD.
Result: Higher output and employment in the short run.
Expansionary monetary policy
Lower interest rates (i) or increase money supply (M).
Cheaper credit encourages investment (I) and consumption (C).
Boosts AD and reduces cyclical unemployment.
Supply‑side Policies
Improve the productive capacity of the economy, making it easier for labour to be employed.
Education and vocational training – raise skill levels.
Labour market reforms – reduce hiring/firing costs, improve flexibility.
Tax incentives for firms that create jobs.
Infrastructure investment – reduces transport costs and improves efficiency.
Policy Trade‑offs
While aiming for full employment, governments must consider possible side effects:
Inflationary pressure – If AD is pushed beyond potential output, price levels rise.
Budget deficit – Expansionary fiscal policy may increase borrowing.
Interest‑rate crowding‑out – Higher government borrowing can raise interest rates, reducing private investment.
Time lags – Recognition, implementation and impact lags mean policies may act with a delay.
Illustrative AD‑AS Diagram
Suggested diagram: AD‑AS model showing how expansionary fiscal policy shifts AD rightward, moving the economy from a point of high unemployment (below potential output) to a point closer to full employment.
Key Points to Remember
Full employment is a macro‑economic aim that seeks to minimise cyclical unemployment while accepting a natural rate of frictional and structural unemployment.
Demand‑side policies (fiscal and monetary) are most effective for reducing cyclical unemployment in the short run.
Supply‑side policies address structural problems and improve long‑run growth potential.
Policy makers must balance the benefits of lower unemployment against risks of inflation, higher deficits, and other side effects.