What these unemployment reforms are really all about


There's, as you might have noted, a lot of shouting going on that all we need to do to reduce unemployment is to have some fiscal exansion. Suddenly that will kiss everything better.

However, this really isn't the case: unemployment is always made up of two different kinds. There's the cyclical (which an expanding economy will/should solve) and there's structural, which it won't. And how much of each we have changes over time: even with a constant unemployment rate how much we have of each can change.

But the difference between the two kinds of unemployment is important because each has distinct policy implications. Cyclical unemployment results from low demand and can be easily remedied (or created) by monetary or fiscal policy. Structural unemployment tends to be caused by deeper, underlying, supply-side issues, and is much harder for policy to change.

Where there are supply-side issues, the solutions also need to be supply-side. And no, supply-side does not just and only mean lower marginal tax rates.

It also means, for example, in the work of Richard Layard, forcing the long-term unemployed to become reconnected to the labour market. Perhaps by training, perhaps by make work jobs, perhaps by simply insisting that any job must be taken up. At, and he is quite clear about this, the risk of losing all benefits for not doing so.

It's true that such supply-side reforms won't cure cyclical unemployment: but they're not meant to, they're to deal with the structural part of the problem.