CHAPTERIII ( Solutions of Unemployment )
A. What could be done
A certain amount of unemployment is not controllable, since at any given
point in time people will be in between jobs. If unemployment is too low, then
the economy is considered to be over-heated and inflation is then more of a
concern. Therefore, an unemployment rate below 4% is considered full
In fact, a certain amount of unemployment is factored into any attempt to
control inflation. Although economists dont agree on specifics, it is widely
accepted that a certain number of jobs must be lost to control each 10th of a
percentage point of inflation.
However, if inflation is below 2-3%, and unemployment is above 4%, then
ways to stimulate the economy are considered. The primary method for the
Federal Reserve to change monetary policy by reducing the Fed Funds Rate.
This lowers overall interest rates and spurs businesses to borrow money to
invest in their businesses and eventually hire more workers. Low interest rates
also boosts the housing market, creating wealth and increasing personal
The second method is through fiscal policy. The Government can directly
create jobs through increased spending on government projects, as happened
in the New Deal, or through tax cuts, which stimulates spending just like an
interest rate decrease.
Not all fiscal policy solutions are created equal. Several research studies
show that the most cost effective solution is providing construction jobs for, of
all things, mass transit. The next most cost effective is unemployment benefits,
and the third best jobs provider is funding education. Tax cuts, whether payroll
or across-the-board income tax, are less effective.
While a high unemployment rate indicates an economy in...