In
view of its high cost on the individual and the society, all nations view the
reduction (or if possible, elimination) of unemployment as a key macroeconomic
goal (objective). In fact, economic development has been viewed in terms of
what is happening to unemployment, poverty and inequality. To fight
unemployment is to bring hope to the lives of many and to steer the economy to
the path of realizing its full potentials. It is necessary to point out,
however, that in a functional economy where prices and wages are flexible,
cyclical unemployment will normally fizzle out in the long run.
view of its high cost on the individual and the society, all nations view the
reduction (or if possible, elimination) of unemployment as a key macroeconomic
goal (objective). In fact, economic development has been viewed in terms of
what is happening to unemployment, poverty and inequality. To fight
unemployment is to bring hope to the lives of many and to steer the economy to
the path of realizing its full potentials. It is necessary to point out,
however, that in a functional economy where prices and wages are flexible,
cyclical unemployment will normally fizzle out in the long run.
In
other words, the economy will manage to get back to full employment in the long
run through adjustment in prices and wages. But this process of adjustment is
usually very slow, and of course, painful. To cut short the process, fiscal and
monetary policies could be used to boost aggregate demand in the short-run.
This could include reduction in taxes, expansions in government spending,
increasing the money supply, reducing the rate of interests etc. However, a
more lasting solution to the unemployment problem will have to entail reducing
the natural rate of unemployment. Expansionary fiscal and monetary policies can
wipe off or reduce cyclical unemployment by stimulating aggregate demand in the
short run, but, in the long run, the performance of the economy can only be
improved (that is economic growth can only be realized) by increasing the level
of full employment and potential output.
other words, the economy will manage to get back to full employment in the long
run through adjustment in prices and wages. But this process of adjustment is
usually very slow, and of course, painful. To cut short the process, fiscal and
monetary policies could be used to boost aggregate demand in the short-run.
This could include reduction in taxes, expansions in government spending,
increasing the money supply, reducing the rate of interests etc. However, a
more lasting solution to the unemployment problem will have to entail reducing
the natural rate of unemployment. Expansionary fiscal and monetary policies can
wipe off or reduce cyclical unemployment by stimulating aggregate demand in the
short run, but, in the long run, the performance of the economy can only be
improved (that is economic growth can only be realized) by increasing the level
of full employment and potential output.
This
involves reducing the natural rate of unemployment. To reduce the natural rate
of unemployment will call for policies that impact on the supply side of the
economy. Supply-side economics entails the employment microeconomic policies
and incentives to change the level of full employment, the level of potential
output as well as the natural rate of unemployment. Examples of such
policies/incentives are;
involves reducing the natural rate of unemployment. To reduce the natural rate
of unemployment will call for policies that impact on the supply side of the
economy. Supply-side economics entails the employment microeconomic policies
and incentives to change the level of full employment, the level of potential
output as well as the natural rate of unemployment. Examples of such
policies/incentives are;
Policies that reduce frictional
and structural unemployment: For example
training facilities may be established to help redundant workers to acquire
relevant skills. The government may also fund specialized employment units or
agencies, such as the national directorate of employment (NDE) in Nigeria, to
train young school leavers to acquire skills for self-employment or such skills
as are necessary to get jobs in the labor market. In addition, the government
can introduce special measures to encourage persons that have been previously
employed, but now unemployed, back into the labor market. This will involve
facilitating the locating of job opening etc.
and structural unemployment: For example
training facilities may be established to help redundant workers to acquire
relevant skills. The government may also fund specialized employment units or
agencies, such as the national directorate of employment (NDE) in Nigeria, to
train young school leavers to acquire skills for self-employment or such skills
as are necessary to get jobs in the labor market. In addition, the government
can introduce special measures to encourage persons that have been previously
employed, but now unemployed, back into the labor market. This will involve
facilitating the locating of job opening etc.
Introducing investment
subsidies or tax breaks: This will encourage
entrepreneurship and hence lead to an expansion in production and employment.
Other policies aimed at reducing the rate of interest will further encourage
investment activities.
subsidies or tax breaks: This will encourage
entrepreneurship and hence lead to an expansion in production and employment.
Other policies aimed at reducing the rate of interest will further encourage
investment activities.
Reducing the marginal rate of
taxation (offering the tax carrot): It is believed
that reduction in the marginal rate of taxation stimulates incentives to work
(since take-home-pay is now increased), encourage people to invest, innovate
and take risks (since profit after tax is now bigger) and thus, can lead to
expansions in output and income. Supply side economists argue that reduction in
the marginal tax rate need no lead to fall in government tax revenue and may
even lead to enlarged revenue since both tax evasion and tax avoidance are
expected to be reduced when the marginal tax rate is lower. In addition, when
more persons choose to work on account of reductions in the marginal tax rate,
the government will not need to pay so much as unemployment benefits etc.
Arthur Laffer demonstrated that after a certain region, there is an inverse
relationship between the tax rate and tax revenue so that reduction in the tax
rate over the region does not lead to deficit budgets (see Fig. 8-4). This
relationship has come to be known as the Laffer curve.
taxation (offering the tax carrot): It is believed
that reduction in the marginal rate of taxation stimulates incentives to work
(since take-home-pay is now increased), encourage people to invest, innovate
and take risks (since profit after tax is now bigger) and thus, can lead to
expansions in output and income. Supply side economists argue that reduction in
the marginal tax rate need no lead to fall in government tax revenue and may
even lead to enlarged revenue since both tax evasion and tax avoidance are
expected to be reduced when the marginal tax rate is lower. In addition, when
more persons choose to work on account of reductions in the marginal tax rate,
the government will not need to pay so much as unemployment benefits etc.
Arthur Laffer demonstrated that after a certain region, there is an inverse
relationship between the tax rate and tax revenue so that reduction in the tax
rate over the region does not lead to deficit budgets (see Fig. 8-4). This
relationship has come to be known as the Laffer curve.
Breaking, weakening or reducing
the power of organized labor: Through changes in
the law governing trade unionism or direct regulation of wages. This will help
to eliminate classical unemployment by ensuring that wages are not arbitrarily
high and are flexible enough to adjust to changes the economy might indicate.
However, the absence of a virile labor union to cater for the welfare of
workers, may, on its own, create a disincentive to work. Again, breaking union
power will call for a lot of political will (in areas where government is a
major employer of labor). What is however certain is that for classical
unemployment to be reduced or wiped off, the government has to ensure that
wages are matched with labor productivity.
the power of organized labor: Through changes in
the law governing trade unionism or direct regulation of wages. This will help
to eliminate classical unemployment by ensuring that wages are not arbitrarily
high and are flexible enough to adjust to changes the economy might indicate.
However, the absence of a virile labor union to cater for the welfare of
workers, may, on its own, create a disincentive to work. Again, breaking union
power will call for a lot of political will (in areas where government is a
major employer of labor). What is however certain is that for classical
unemployment to be reduced or wiped off, the government has to ensure that
wages are matched with labor productivity.
The
Laffer curve relates tax rate to tax revenue. The curve suggest that government
can increase tax revenue by increasing the tax up to a certain point (point b)
beyond which increases in the tax lead to decreases in government tax revenue.
The optimum tax rate is 40% and the maximum possible tax revenue is Tb. An
increase in the tax beyond point b, e.g. from b to c lead to a fall in tax
revenue of TcTb. The revenue obtained from the application of the tax rate of
75% is just equal to that obtained from a tax rate of 25%. (i.e., points a and
c yield the same tax revenue). This is because of the disincentives to work and
the incentive to tax evasion and avoidance created by the higher tax rate, such
that there is a reduction in the size of the tax base. Thus, a reduction in the
tax rate from 75% to 25% (point c to point a) will stimulate investment, labor
supply, employment and output, without leaving a negative effect on tax
revenue. What is more? If tax is reduced from 75% to 40% (movement from c to b
on the curve), employment and output
will not only be increased, tax revenue will be raised to its optimum level.
Thus, lower tax rates are compatible with constant and even enlarged tax
revenues.
Laffer curve relates tax rate to tax revenue. The curve suggest that government
can increase tax revenue by increasing the tax up to a certain point (point b)
beyond which increases in the tax lead to decreases in government tax revenue.
The optimum tax rate is 40% and the maximum possible tax revenue is Tb. An
increase in the tax beyond point b, e.g. from b to c lead to a fall in tax
revenue of TcTb. The revenue obtained from the application of the tax rate of
75% is just equal to that obtained from a tax rate of 25%. (i.e., points a and
c yield the same tax revenue). This is because of the disincentives to work and
the incentive to tax evasion and avoidance created by the higher tax rate, such
that there is a reduction in the size of the tax base. Thus, a reduction in the
tax rate from 75% to 25% (point c to point a) will stimulate investment, labor
supply, employment and output, without leaving a negative effect on tax
revenue. What is more? If tax is reduced from 75% to 40% (movement from c to b
on the curve), employment and output
will not only be increased, tax revenue will be raised to its optimum level.
Thus, lower tax rates are compatible with constant and even enlarged tax
revenues.
