UNEMPLOYMENT & AGGREGATE DEMAND

“The current economic crisis proves beyond doubt that unemployment is principally the result of a deficiency in aggregate demand.” Discuss this claim.

The current economic crisis proves beyond doubt that unemployment is principally the result of a deficiency in aggregate demand. Discuss

Introduction

In 1992 Unemployment in the UK rose to 3 million, a lot of this was due to the recession of 1992. In a recession, demand deficient unemployment will increase. This is because as firms close down they have to lay off workers. Therefore, in this case, it is important for the government to try and boost AD and increase the rate of economic growth. For example, the government could pursue expansionary fiscal policy; e.g - lower taxes and higher government spending. This will lead to an increase in AD and therefore, higher growth and jobs will be created reducing unemployment. (Yates, 2008)

If AD increases too quickly it will cause inflation. Therefore, the growth may be unsustainable and the boom may lead to a bust. In this case the job creation will only be temporary. Therefore, it is important to manage AD, so as to maintain stable, low inflationary growth. This will allow a sustained reduction in unemployment. To a large extent, this is what has happened in the UK since 1992. The MPC has used monetary to enable low inflation and stable growth.

Therefore AD is very important. However, there are many other types of unemployment which will not be reduced through demand management. (Anyadike-Danes, 2008)

Discussion

Unemployment ever thinks about what happens to people when they loose their job? Where do they go? What do they do? How do they provide for their family? These are everyday facts about unemployment, one of the largest measuring sticks for an economy. Unemployment is an important facet of every economy. Although it may seem logical to keep unemployment rates as low as possible, that is not the case. If unemployment rates drop to far down, this may lead to inflation. (Davidson, 2006)

The reason being that if there is a low unemployment rate then there will be a shortage of skilled workers, thus, pushing employers to raise wages and benefits which will in turn raise prices. Over the years, there have been really high highs and really low lows when it comes to unemployment. Currently the unemployment rate is at it's lowest in twenty five years. The booming economy has helped drop the unemployment rate to below four percent, which is the lowest since 1970. These low rates have been caused by many factors. Some of which include growth in the industrial output of the United Kingdom, a booming stock market, and some natural elements such as recent hurricanes.

In order to asses the affects of these different factors on the unemployment rates, economists must have some type of system to estimate the unemployment rate. One major system that is used deals with the number of “help wanted” ads that are published. This process is a compilation of the number of help wanted ads ...