How Is Unemployment Controlled?

Who Solves the Unemployment Problem?

Help wanted sign in window
••• Drew Angerer / Getty Images

Controlling unemployment depends on the type of unemployment. People usually only ask this question when cyclical unemployment drives the unemployment rate above 7 or 8 percent. Cyclical unemployment is the result of the contraction phase of the business cycle, which usually causes a recession.

When that happens, then the government reduces unemployment by boosting economic growth. The primary method is expansionary monetary policy. That's when the Federal Reserve changes monetary policy by reducing the fed funds rate. This lowers overall interest rates and spurs businesses to borrow money to buy capital equipment and hire more workers. Low-interest rates also boost the housing market and spur auto sales and other personal consumption spending.

The second way the government reduces unemployment is through expansionary fiscal policy. That's when the president and Congress directly create jobs by increasing spending on government projects. Good examples are the New Deal and the 2009 Economic Stimulus Program. They can also give people more income to spend by cutting taxes. Examples of those are the Bush tax cuts in 2001 (EGTRRA) and 2003 (JGTRRA). In 2010, the Obama tax cuts extended those with modifications. This stimulates spending just like an interest rate decrease.

There are also many things you can do to protect yourself from unemployment. A higher-level degree for an in-demand occupation is a good start. You should also keep finding ways to increase your competitive advantage throughout your career.

When Unemployment Can't and Shouldn't Be Controlled

A certain amount of unemployment is not controllable since at any given point in time people will be in between jobs. This is known as frictional unemployment, and it's actually healthy for an economy. It allows people to feel free enough to quit a job so they can look for a better one. That means both employers and employees will find a good fit and be more productive.

If unemployment is too low, then the economy is considered to be over-heated. At that point, inflation becomes more of a concern. An unemployment rate below 4 percent is considered full employment.

In fact, a certain amount of unemployment is factored into any attempt to control inflation. Although economists don’t agree on specifics, it is widely accepted that a certain number of jobs must be lost to control each tenth of a percentage point of inflation.

Structural unemployment is when there are jobs available, but the existing workers don't have the skills to fill those jobs. It can happen when technology changes the nature of the work itself. For example, personal computers replaced stenographers and typists. And in Silicon Valley, high tech companies have to look to India to find enough programmers to fill their needs.