Candidate response

The primary difference between structural and cyclical unemployment is time frame.  Cyclical unemployment is short-term and occurs when workers lose their job as a result of falling aggregate demand in an economy.  Sometimes called demand deficient unemployment, cyclical unemployment occurs during a down cycle in the economy because it occurs during a downturn in the trade cycle. It affects the whole economy but particularly those producing goods and services with high YED elasticity.  This can be illustrated by a diagram showing the fall in aggregate demand from AD1 to AD2, causing a recessionary gap from Y1 to Y2.  The fall in economic activity leads, inevitably, to a loss of jobs in the economy.

Structural unemployment, in contrast to cyclical unemployment, is longer term joblessness and occurs when workers lose their jobs because a specific industry is in decline and newly unemployed workers are then unable to access the new opportunities that emerge in expanding industries.  Structural unemployment, therefore, results from a lack of occupational and geographical mobility in the labour market.  One reason for this might be a result of technological change where labour saving machinery is introduced into a workplace.  A second reason might be when a business is forced to close down because of competition from lower wage economies.  This is a particular cause of structural unemployment in fast developing economies, where workers in the agricultural sector are replaced by machinery and farm workers lack the education and/or skills to gain a new position in the secondary sector.  

Candidate response

(b) Monetary policy can be described as a type of government policy where the government or central bank manipulates the supply of money in order to influence the level of aggregate demand in an economy.  In the context of this question a government or central bank could use expansionary monetary policy to increase aggregate demand in the economy and reduce cyclical unemployment rates.  There are three tools of monetary policy that could be used in this example.  Firstly, a government or central bank could increase the supply of money in the economy by purchasing government bonds (a policy known as quantitative easing).  Secondly, a government or central bank could reduce the central interest rate (which encourages consumers and businesses to borrow funds to fuel investment and consumption).  Lastly, the government or central bank could loosen credit regulations.

When the government or central bank increases the money supply, the rate of cyclical unemployment is likely to fall - ceteris parabus.  Following the reduction in interest rates or other policy aimed at raising the supply of money, individuals and institutions are encouraged to borrow more and saving is discouraged, leading to a rise in aggregate demand.  This is illustrated on diagram 1, where expansionary monetary policy increases both C and I to the point where aggregate demand rises from AD1 to AD2 and real GDP increases from Y1 to Y2. According to Keynesian economc policy the rise in national income then brings about a rise in demand for all commodities, including labour, reducing cyclical unemployment rates.

A second impact of expansionary monetary policy is the effect on the exchange rate as a tool of monetary policy.  A rise in the supply of money is likely to result in a devaluation and this will lead to a fall in export prices and an increase in import prices relative to an economy’s competitors.  This further increases aggregate demand in the economy and suppressing demand-deficient unemployment further.

On the other hand, it would be wrong to presume that expansionary unemployment must always reduce cyclical unemployment levels, as governments throughout the world discovered when employing the policy to protect employment and living standards during their collective Cvoid-19 responses.  For example, the UK central bank employed highly expansive monetary policies throughout 2021 and the beginning of 2022.  The policy was ineffective at raising either employment or income levels due to significant supply shortages - including shortages of labour.  Rather than increasing employment and income, therefore, the policy resulted in higher inflation levels from PL1 to PL2 only. 

Other weaknesses of the policy is that even when there is obvious spare capacity in the economy and the policy is effective, it is likely to only be effective short term and many economists would argue that such a policy merely leads to periods of ‘Stop and Go’ that are not conducive to economic growth and lower unemployment rates long term.

However, monetary policy is likely to be less successful in reducing other types of unemployment. For example, frictional unemployment occurs when people are moving from one job to another and there is always likely to be some form of frictional unemployment in an economy.  This means that regardless of how successful any expansionary monetary policy might be in increasing aggregate demand, it is difficult to see how this might have any real impact on the level of frictional unemployment - unless we presume that an individual 'inbetween' jobs is more likely to find a new position quicker during a period of high demand for labour.

Similarly structural unemployment will still exist, regardless of the effectiveness of monetary policy in creating economic growth.  This is because structural unemployment is long term and as such unaffected by the peaks and troughs of economic activity.  Technological change is a key feature of modern economies and as the impact of technological progress affects an economy, with a move from capital to labour, some workers are likely to continue to lose their jobs - regardless of demand for the specifc product.  The diagram to the right illustrates this, where a fall in demand for labour within a specific industry has resulted in a loss of income and employment, within that specific industry. That said, decline within specific industries is likely to be less common when aggregate demand levels are high and firms are more willing and able to train new staff during such periods.

Finally, when expansionary monetary policy increases the level of aggregate demand in an economy, workers may find it easier to obtain seasonal work.  This is especially true within industries such as tourism which are highly income elastic and likely to recruit more workers during periods of high economic growth.  Unlike cyclical unemployment, however, the relationship is less obvious and unemployment may continue to exist at certain times of the year, regradless of demand levels in the wider economy.