What Is Being Done to Control Unemployment?

janet yellen controls unemployment
Federal Reserve Chair Janet Yellen testifies on Capitol Hill in Washington, before the Senate Banking Committee. She delivered the semiannual Monetary Policy Report to Congress. Yellen said that recent economic data have pointed to weaker-than-expected gains in consumer spending and job growth. Photo by Brooks Kraft LLC/Corbis via Getty Images

What is being done to control unemployment depends on the type of unemployment. People usually only ask this question when cyclical unemployment drives the unemployment rate above 7 or 8%. 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, as happened in the New Deal and the Economic Stimulus Program. They can also give people more income to spend by cutting taxes, like the Bush tax cuts in 2001 (EGTRRA) and 2003 (JGTRRA), and the Obama tax cuts in 2010. This stimulates spending just like an interest rate decrease.

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.You want people to be able to feel free to quit a job to spend full-time looking for a better one. That means both employers and employees will find a good fit, and be more productive.

Furthermore, is 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 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 10th 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 work itself. For example, personal computers replaced stenographers and typists. It's currently the situation in Silicon Valley, where high tech companies have to look to India to find enough programmers to fill their needs. 

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