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Sept 2008, qus. 23

B

Bharti Singla

Senior Member
Which of the following is best suited for reducing the level of structural unemployment?
A. lowering the rate of interest
B. raising the rate of unemployment benefit
C. higher voluntary redundancy payments for workers in declining industries
D. more government funds for retraining of the unemployment

Correct answer is D. I understand the reasoning behind it. There was a question in past papers which explains : structural unemployment arises because of lack of skills needed for the job.

But, if I consider option A:
Lowering the rate of interest will lead to people saving less and consuming more, so aggregate demand will rise. As AD rises, production will rise so unemployment will reduce.
As the material suggests that 'structural unemployment is caused by either due to change in demand or change in production method'.

Could anyone please clarify?
 
Hi Bharti

I think 'change in demand' as a cause of structural unemployment is referring to a change in demand for the products of a particular industry (rather than change in demand in the economy as a whole). The textbook mentions the change in demand may be caused by changes in consumer tastes or competition from other industries or from overseas competition.

I agree that reducing interest rates to increase aggregate demand should lead to firms increasing output and employing more people. But this is a pretty blunt instrument; it is likely to apply across the economy as a whole, rather than the specific industry affected by structural unemployment. There is a risk here that, although AD increases across the economy as a whole, demand in the industry affected by structural unemployment is not impacted (because, for example, the change in consumer taste means that consumers simply don't want to buy this industry's products any more).

In contrast, funds for retraining can be targeted at that industry's ex-employees. The question asks us which option is best suited, so I would expect Option D to be the correct answer.

I hope that helps
Gresham
 
Hi,

Thanks for the explanation, make sense.

But, if a question asks to define structural unemployment, what should we write? As I can see two different definitions here.
 
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