STRATEGIES TO REDUCE UNEMPLOYMENT

The govt has undertaken many special programmes to

generate employment opportunities. The major ones
among them are:
RURAL WORKS PROGRAMME:
-

Construction of civil works of permanent nature in

rural areas.

INTEGRATED DRY LAND AGRICULTURAL

DEVELOPMENT:
-

Permanent works like soil conservation,

development of land and water harnessing are
undertaken.

NATIONAL RURAL EMPLOYMENT

PROGRAMME:
-

to create community assets for strengthening rural

infrastructure like drinking water wells, community
works, irrigation wells, rural roads, schools etc.

The Rural Landless Employment Guarantee Programme

aims at generating gainful employment, creating
productive assets in rural areas and improving the overall
quality of rural life.
SKILL DEVELOPMENT:
-

a skilled labour is one who has proper training and

education to work in a particular field.

Training and education increase the productivity

of workers.

Educate and provide specialized training to the

labour force

To ensure continuous employment of labour

Able to absorb new technologies at work.

To compete with labour force of the other

developed countries.
With a view to impart shills through training, the govt
of India has taken many steps.

The Central Board Of Workers Education

(CBWE) formed in1958 is creating understanding and
enthusiasm among workers.

There are around 4300 Industrial Training

Institutes (ITI) to produce specialized workers.

Various ministries of the govt of India are

providing vocational Education and Training which
has introduced vocational education in the school
system and there is a provision for vocational
education after class X.

Problems associated with these steps are

-

Restructuring and reorientation of ITI courses with

the changing system.

Industry-institute interaction continues to be weak.

Vocational system in schools has to be modified.

ENTREPRENEURIAL DEVELOPMENT:
Growth of employment involves
-

setting up of new businesses

Expertise and organizing ability

Training and implementing schemes which are

necessary to promote self-employment.

Low cost capital provided by the Govt to small

enterprises and self-employed persons to develop their
entrepreneurial ability.

Giving technical and professional help in running

the business.

Banks providing credit faci lities at concessional

rates.

All the above have helped in expansion of Indias

industries and business into newer domains and
regions.

10 Strategies that the Government has undertaken to

Reduce Unemployment in India
1. Heavy Investment in Basic Industries:
Investment in heavy and basic industries and consumer
goods industries should be increased. They provide more
employment along with the supply of consumer goods.
2. Development of Cottage and Small-scale Industries: As
they provide more employment by adopting labour
intensive techniques.
3. Change in Educational System: More emphasis should
be given to vocational education.
5. Checking of Population Explosion: Rapidly rising
population should be checked by adopting family planning
and welfare schemes.
6. Modernisation of Agriculture: Modernisation of
agriculture should be done. Waste lands should be utilised.
7. Introduction of Rural Works Programmes: Rural works
programmes should be increased.
8. Developing Infrastructure of Economy: Infra-structure of
the economy should be developed.
9. Subsidies to Private Sector: Subsidies and other
incentives should be given to private sector.

10. Stress on Self-employment: Young entrepreneurs

should be financed for self-employment.
Policies to reduce Unemployment
Government policies to reduce unemployment must be
based upon the types and causes of unemployment that are
prevalent. It may be worth glancing back to that section to
remind you of the major kinds of unemployment; however,
we will go into more detail in this section. General policies
such as cuts in direct taxes should be effective across any
kind of unemployment, as it increases the appeal of any job
to any potential employee.
Real Wage Unemployment
This is unemployment as a result of a kind of market
failure, a failure of the labour market to respond to changes
in demand. If demand for workers rises, it is logical that
they will demand greater real wages (diagram). Similarly,
if demand falls, workers should expect to suffer lower real
wages for the same work. Unfortunate though it may seem,
that is the way the market works! Real wage
unemployment is usually caused by a combination of:

Strong trade unions - giving employees greater

power over deciding wage conditions with the threat
of industrial action (strikes etc.) With strong unions,
firms will not be able to reduce wages when demand is
low, leading to bankruptcy (unemployment) or layoffs
of workers (unemployment)
Wage 'stickiness' - Employees on long term contracts
will have a fixed wage over a long period of time. If a

downturn in demand occurs, wages cannot fall

immediately in response - they are 'sticky'
Minimum wage - This is a characteristic of most
modern economies, guaranteeing every worker a
minimum standard of living. Whilst this is
undoubtedly wonderful, if the minimum wage is set
too high, the labour market is once again inflexible

Government policies to tackle this form of unemployment

are invariably unpopular for workers, as their wage levels
are threatened to the benefit of firms and businesses.
However, it is largely appreciated that, for example, overly
strong trade unions can utterly paralyse an economy (see
Margeret Thatcher's time as Prime Minister in the UK).
Policies to combat real wage unemployment include trade
union reform (reducing their powers), increasing firms'
ability to change wages and encouraging shorter term
contracts and ensuring that the minimum wage level does
not adversely impact the economy.
Frictional Unemployment
Remember, this is unemployment generated through
incomplete information of the labour market. This can be
solved in two main ways. Firstly, increasing the knowledge
of the local vacancies through government funded 'job
centres' could reduce time between jobs. Secondly,
increasing the incentive to search for suitable jobs (such as
reducing unemployment benefits and lower taxes on
wages) could serve the dual purpose of increasing
incentives to search for work, and making more vacancies
acceptable to the unemployed individuals.

Cyclical Unemployment
It is worth noting that this form of unemployment can also
be known as Keynesian or demand-deficient
unemployment. Over the economic cycle demand changes,
and regardless of how flexible wages are, unemployment
will rise of fall (diagram). There are clear links between the
rate of economic growth and the level of unemployment. It
is clear that in a depression, unemployment will rise, as
demand for good and services falls. This could result in a
negative multiplier effect, without government
intervention. Policies to reduce the impact of Keynesian
unemployment include:

Increased government spending - this includes

reductions in taxes. Increased G will cause an outward
shift in AD, and may create a multiplier effect.
Theoretically, government spending to pay workers to
dig huge trenches and fill them in again will help, as it
increases national income. However, targeted policies
to increase the quality of infrastructure or levels of
investment will be more effective. Also, reductions in
direct taxes will encourage more people into work,
and also increase the level of disposable income,
hopefully leading to a positive multiplier effect
Reduction of interest rates - remember that a fall in
interest rates can also stimulate AD. Return to that
section to remind yourself that a fall in interest rates
encourages consumption and investment

Geographical Unemployment
Naturally, policies to reduce geographical unemployment
will seek to decrease geographical immobility of labour.
This is the inability of people to relocate from areas with
low demand for labour, to areas with high demand for
labour. Policies to reduce geographical unemployment
include:

Regional Incentives - this is regional policy to

increase the incentives for new businesses to locate in
areas of high unemployment, thus reducing regional
variations in unemployment caused by geographical
immobility
Reducing geographical immobility - is the second
and more direct method of combatting geographical
unemployment. It aims to reduce geographical
immobility by reducing barriers to free movement of
workers (such as no border controls and cheap
housing). This is more difficult within a country as the
barriers are often social in nature, such as family ties.

Structural Unemployment
This is the inability of workers to change the kind of
employment (for example from manufacturing to IT) they
are in. Left without intervention, this could lead to
dangerous long term unemployment, whereby workers find
it increasingly difficult to find jobs as they become less
desirable the longer they are unemployed. Policies to
reduce occupational unemployment include:

Retraining - incentives for both companies to retrain

and employees to take part in training to make them
more attractive and useful to firms. Governments may
also directly take part in retraining projects where
unemployment levels as a result of structural
unemployment are very high
Reducing geographical immobility - could result in
no need for retraining programs, as worker could
simply move to an area in which their skills are in
high demand. This works providing the costs
associated with reducing geographical immobility are
lower than those required for occupational-orientated
projects such as retraining, and that their skills are in
demand somewhere.

policies to reduce unemployment

In the long term, effective policies to reduce the total level

of unemployment need to encourage
An improvement in the employability of the labour
supply - so that the unemployed have the right skills to
take up the available job opportunities. Policies should
focus on improving the occupational mobility of labour
An improvement in the incentives for people to search
and then accept paid work - this may require some
reforms of the tax and benefits system
A sustained period of economic growth so that new jobs
are being created - this requires that aggregate demand is
sufficiently high for businesses to be looking to expand
their workforces
Improving skills and reducing occupational immobility
Policies should provide the unemployed with the skills they
need to find re-employment and improve the incentives to

find work. Structural unemployment is the result of

workers being occupationally immobile - improvements in
education and training will increase the human capital of
these workers, and therefore give them a better chance of
taking the new jobs that become available in the economy.
Reflating Aggregate Demand
The government can also use macro-economic policies to
increase the level of aggregate demand. These policies
might involve lower interest rates or lower direct taxes. It
might also encourage foreign investment into the economy
from foreign multinational companies. In the diagram
below we see an increase in aggregate demand leading to
an expansion of aggregate supply. Because of the increase
in demand for output, the demand for labour at each wage
rate will grow - leading to an increase in total employment.

Not every increase in demand and production has to be met

by using more labour. Each year we expect to see a rise in
labour productivity (more output per worker employed).

And, businesses may decide to increase production by

making greater use of capital inputs (machinery and
technology).
Benefit and Tax Reforms
Reducing the real value of unemployment benefits might
increase the incentive to take a job - particularly if the real
worth of unemployment benefits is well below the national
minimum wage rate.
Targeted measures are designed to help the long-term
unemployed find re-employment (including the
Government's "Welfare to Work Schemes" - see New Deal
Employment Subsidies
Government subsidies for those firms that take on the longterm unemployed will create an incentive for firms to
increase the size of their workforce. Employment subsidies
may also be available for overseas firms locating in the
UK.
Economic Growth and Unemployment
A growing economy creates jobs for people entering the
labour market for the first time. And, it provides
employment opportunities for people currently unemployed
and looking for work

The chart above shows the level of real national output

(GDP) and total employment in the economy since 1980. In
both of the last two recessions (1980-81 and 1990-92), the
number of people in work has fallen sharply. But a period
of sustained economic growth (as experienced by the UK
from 1993-2001) has led to a significant increase in
employment levels. Indeed by the summer of 2001,
employment in the British economy was at record levels.
This has helped reduce the official measures of
unemployment to a level not seen for over twenty-five
years.

A range of government policies are available for

Governments wanting to reduce the scale of unemployment
in the economy. These policies need to focus on the
underlying causes of unemployment for them to be
successful.

Real Wage

Keynesian

Structural

Frictional

Real Wage Unemployment

Prescriptions for reducing real wage unemployment
normally focus around the strategy of making each labour
market more flexible so that pay conditions become more
adaptable to changing demand and supply conditions. Real
wages should rise when demand, output and employment
and rising, but they may need to fall if an industry

experiences recession which puts jobs at threat. The UK

economy has developed a flexible labour market model
similar to that of the United States during the last fifteen
years.
Trade Union reforms were a centre-piece of the
Conservative Government's strategy to improve the
performance of the labour market. The Labour Party under
Tony Blair has not reversed these reforms since coming to
office, although some new legislation has been introduced
to give workers the right to achieve union recognition. A
National Minimum Wage has also been introduced.
Keynesian Unemployment
Policies to reduce Keynesian demand-deficient
unemployment need to raise the level of aggregate demand
for goods and services in the economy. A number of
options are available.

Increased Government Expenditure

The Government can raise the level of its own spending.
This "fiscal pump-priming" directly increases aggregate
demand and can have a multiplier effect on equilibrium
national income. The government could raise current
expenditure (for example raising pay levels in education
and the health service) or expand spending on capital
projects which add to the stock of capital (for example
spending on new roads, new hospitals or other major
infrastructural projects). Sustained economic growth
provides a platform for more jobs to be created in the
economy.
Lower Taxation
A reduction in direct taxation increases consumers'
disposable income and should boost household spending.
The effect may be greater if taxes are cut for people on
lower than average incomes. These tax-payers are likely to
spend a greater percentage of their disposable income.
Lower interest rates
A relaxation of monetary policy through lower interest rates
encourages the demand for credit, reduces saving and
increases consumers' real 'effective' disposable incomes; all
of which will boost consumption and demand. It may also
encourage firms to invest, as the marginal cost of
investment will fall. Remember that interest rates are not
set by the government. The Bank of England now sets

interest rates each month at the meetings of the Monetary

Policy Committee.
Depreciation of the exchange rate
A lower value for the pound should lead to a rise in the
orders of exports from UK firms and to a reduction of
import penetration by making exports cheaper and imports
more expensive.
Remember the importance of time lags!
Government policies to stimulate increased aggregate
demand for domestic output take time to have their effect.
There are variable time lags between the government
relating the economy using fiscal and or monetary policy
and the final effect on output and employment in specific
industries.

Structural Unemployment

There are a number of different approaches that can be

adopted to help alleviate structural unemployment. These
are sometimes known as active labour market policies. The
first involves direct government action to match jobs to the
unemployed.
Regional policy incentives
Gives grants and subsidies to firms to locate in areas of
high unemployment. However, this does not solve the
problem of occupational immobility. Often regional policy
requires extra retraining schemes to give workers the
relevant skills to allow them to take up new jobs.
Investment in worker training
Spending on training schemes to re-skill the unemployed
through investment in vocational education or guaranteed
work experience for unemployed "outsiders" in the labour
market.

Improving geographical mobility of labour

The government could provide grants or low cost housing
to encourage workers to move to other regions where there
are jobs. The problem with this policy is that people are
inherently immobile as they are often bound by family and
social ties.
Market solution - no need for government to get involved!
One approach is to simply leave the problem of structural
unemployment to the market. Some economists argue that
intervention slows the natural reallocation of resources to
high growth areas and only makes the problem worse. In
areas of above average unemployment it may make some
sense to allow wage levels to fall to attract new capital into
an area.

Frictional Unemployment
Lower real values of unemployment benefit and improved
job information
The implementation of the Job Seeker's Allowance in 1996
ensures that workers are actively seeking work as the
payment of benefit is dependent on them proving this at
fortnightly interviews.
However, if the government reduced the real value of
unemployment benefits, or limited the duration of a claim,
search times between jobs could be reduced even further as
workers would have to quickly take on new positions
before their financial situations deteriorated.
Better information on job vacancies in the labour market
can help to reduce job search.
Cuts in direct taxes
The government could reduce direct taxes for the low paid
to increase the post tax wage and, therefore, encourage
them to find work more quickly. The Labour Government
is introducing a 10% starting rate of tax to encourage more
low income groups back into work.
Most analysts believe that tax cuts on their own are
insufficient to reduce frictional unemployment.
Complementary reforms to the benefits system to reduce
the problem of the poverty trap may also be needed.

Conclusion
It can be safely said from the information
gathered that unemployment cant be generalized as
being caused by just one thing, but is caused by a
variety of reasons. Some of the main factors are:
relevant skills, educational qualifications, and the
organization of choice. More emphasis should be
placed in educating people and creating jobs.