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Explain the difference between structural and cyclical unemployment.

Unemployment is generally defined as the number of people available and wanting to work who cannot do that. There are many types of unemployment, but the two main ones that government fights against are structural and cyclical

Structural unemployment is a result of decline in an industry (e.g. coal or steel) usually affecting old industries with labour intensive production methods as the newer technology that can replace the labour becomes available. This type of unemployment affects usually certain parts of a country where a declining industry is consentrated. This has happened to West-Midland that was a wealthy and developing area, but as a result in decline of heavy industry became affected by unemployment. The structural unemployment makes the North-South division in Britain even stronger and leads to cumulative decline as history of trade unions discourages new firms to enter.

Government has two types of policies to fight with it, called workers to the work (relocation grants, training schemes) and work to the workers (benefits to firms in declining areas). These policies have numerous disadvantages as hey result in inefficient allocation of resources and might leave the regions of high unemployment with even poorer situation as young and mobile people move out.

Cyclical unemployment is the result of a general depression in the economy resulting from the trade cycle. Before the first world war the booms and recessions swapped after every 7 year, but the recession in 1930ies broke the cycle. Cycle is now much shorter. Cyclical unemployment usually brings with it a fall in GDP and was considered to be natural until Keynes proposed that government should use fiscal policy to eliminate it. This worked fine until 1970ies, but then brought inflation with it, also some might argue that the time lags involved until the policy starts working might even stress the cycle.

Both types of unemployment might exist at the same time, but care must be taken with measures against them as e.g. fiscal policy for curing the structural unemployment might have inflationary effects as other industries might be working with full capacity.

What are the supply side measures to reduce unemployment?

The other view controversial to the Keynsian view for fighting the unemployment by fiscal measures is the supply side view to make the production more efficient and competitive and thus increase the employment. The achievement of effective supply has been the major idea of conservatives since M. Thatcher came to power after E. Heath in 1979.

The main idea of supply side is to increase the MRP of labour, thus move the demand curve to right that results in higher employment at current wage level. Policy against includes:

As seen, with the increase of MRP to MRP1 the wage has risen to W1 and the quantity employed to Q1.

To increase the MRP people are retrained that makes them more skillful and thus mobile. This is the justification for the expensive training schemes such as YTS, but critics say the schemes are only used to statistically reduce the number of unemployed.

The supply side considers also the economies of scale and the gain in comparative advantage that will be achieved with more suitable production methods.

Their policy includes besides the training schemes for improving the quality of labour also the reduction in welfare payments such as unemployment benefits. It is thought that the benefits are sometimes (especially for low-paid jobs) higher than the actual wage, thus discouraging people to take a job and thus have artificially increased the no. of unemployed. The case against that is obviously the massive starvation amongst unemployed who live on benefit, so the general view is to maintain the level of benefits just below the most low-paid job. 

Supply side economists favour lower levels of direct taxation as it discourages people to work. In  the other hand indirect taxation is regressive and distributes incomes unevenly. With the recent budget income tax was lowered and the selective tax was abolished already long ago.

Trade union and employee rights should also be reduced as they are thought to lead to artificially high wages and thus decreases the no. of workers employed. It is also argued that too high levels discourage the improvement of efficiency and make the employers reluctant of taking in new workforce as they are hard to get rid of. Trade unions might be justified in monopoly situation who employs based on marginal costs that are high because to attract new people firm must raise the existing salary, so it restricts output. Setting a wage floor by trade union might improve situation both for wage and employment.

Wage floors and closed shops should also be abolished as the lead to misallocation of resources and inefficiency.

Supply side supporters generally encourage new technology, although it leads to a technological unemployment in the short term, but in the long term it will improve the efficiency and competitiveness of the UK in the international market. This is very important indeed as UK is very dependant on international trade that counts for over 40% of its GNP.

The new movement because of the EC has been the idea of a fair minimum wage. This contradicts with conservative view of undisturbed economy, in the other hand if set above benefit level increases the incentive to work.

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