Command term: Explain

Key term: Structural unemployment, cyclical unemployment

The command term explain requires a response that distinguished between the two types of unemployment.

Firstly, cyclical unemployment consists of workers unemployed because of a downturn in the economic cycle (a recession).  This is called cyclical unemployment because the former worker is only unemployed because of the state of the economy.  Once the economy has returned to its natural rate of unemployment then the worker is likely to find work given their qualifications, skills and experience.

In the diagram aggregate demand in the economy has fallen from AD1 to AD2, shifting the equilibrium in the economy from point A to point B.  If the market for labour worked in a similar way as the market for other goods and services, then wage levels would also fall to W2.   However, the labour market works differently because it is difficult for firms to actually reduce the price of labour and wages therefore remain at We, with the rise in unemployment represented by the gap between A and C.  Any reduction in wages is more likely to be a fall in real wages rather than absolute wage rates. 

By contrast structural unemployment is a result of workers unemployed because they lack either the skills to find a suitable job or the skills that they possess are not in demand in that region.  An example of this might be a cotton worker, living in a city where the major cotton factory has closed down.  This type of unemployment is also common in former mining towns where the major employer was a coal mine that has now been closed.  This type of unemployment is also common amongst mature workers who have been unable or unwilling to renew their skills and have been left behind in the work place.

This is illustrated in diagram 2, where demand for products within a specific industry has fallen due to competition from a far east competitor and this has led to a fall in the number of workers employed within that industry.  Those workers who are laid off then join the ranks of the structurally unemployed unless they can find alternative employment in a different industry.

Command term: Evaluate

Key term: Unemployment, supply side policies, demand side policies

The command term evaluate requires a response which compares the effectiveness of supply side policies, in comparison with alternative policies (demand side policies) in reducing unemployment.

Real world examples might include nations that have used supply side policies to reduce levels of structural unemployment such as the UK and USA throughout the 1980 and 1990s.  Other examples might include those that have seen sharp falls in cyclical unemployment, following recession, by implementing a policy of expansionary demand side policies.  Examples should note that the effectiveness of demand and supply side policies depends on the type of unemployment that a government wishes to address.

Responses should include the following:

Examples of supply-side policies that may be used to reduce long term unemployment include measures to improve the nation's infrastructure, investments in human capital as well as increased spending on research and development. 

A recognition that supply side measures, unlike demand side policies, are effective in reducing structural unemployment rates, by providing new jobs for workers whose previous skills have become redundant or providing those workers with new skills so that they can compete in the modern jobs market.

Responses should also include an AD/AS diagram illustrating a right shift in the AS curve or an outward shift in the PPF curve, following an increase in aggregate supply in the economy.  This is illustrated In diagram one by a growth in productive capacity and real GDP rising from Y1 to Y2, creating more job opportunities as a result of supply side policies.

A recognition that another advantage of supply side policies is that are more likely than other job creation policies at reducing unemployment in the long run, but do not provide a short term fix, sometimes making them less popular with governments.

A recognition that supply side measures, like all economic policies also have some disadvantage e.g. time-lags and the costs associated with large scale investment and government training projects.  Another disadvantage is that supply-side policies aimed at increased labour market flexibility or a reduction in access to unemployment benefits may also come at a social cost in terms of a reduction in labour protection or employment security.  

In the interests of balance responses should then consider alternative job creation policies, e.g. demand side policies.

An explanation that expansionary demand-side policies can be effective in raising the level of national income / economic growth by increasing one or more of either C, G, I or X.  This in turn reduces cyclical unemployment by increasing the demand for labour.  Illustrated by diagram two showing a rise in real GDP from Y1 − Y2.

Examples of different monetary and fiscal demand-side policies that may increase either consumption, government spending, investment or net exports. 

A discussion of the weaknesses of demand-side policies in reducing unemployment.  For example, time-lags, inflationary pressure, higher levels of government debt, increased import levels or crowding out. 

A recognition that another significant weakness of demand side policies is that they are only effective in reducing cyclical unemployment levels.  Demand side measures are not effective, for example, in reducing levels of equilibrium unemployment.

Relevant real world examples might include fast growing economies such as China, South Korea and Singapore e.t.c. that have successfully employed supply side measures to reduce unemployment levels.  Similarly, nations such as UK, USA and Germany have maintained very low levels of unemployment in part a result of labour market de-regulation and cuts to out of work benefits.