Monday, August 24, 2009

Cyclical Unemployment

Keynesian unemployment occurs due to business fluctuations. This is also called cyclical unemployment. It is so called because business depression occurs at more or less regular intervals. During times of depression, business activity is at low ebb and unemployment increases. Some people are thrown out of employment altogether, others are only partially employed. Advanced capitalist countries have been suffering from time to time from this type of unemployment. This type of unemployment arises not because “too little capital” but because of “too much capital” for a short while in relation to demand for goods and services.

In other words, this type of unemployment is due to the fact that the total effective demand of the community is not sufficient to absorb the entire production of goods that can be produced with the available stock of capital. In a private enterprise economy, production takes place owing to the profit motive. When businessman cannot sell their entire output, their profit expectations are not fulfilled so that their reaction in the next period is to reduce their output. When entrepreneurs decide to reduce their production, some factors of production become unemployed. Since employment is the major source of incomes for a great majority of people, a fall in employment signifies a fall in their income also.


We know that cyclical unemployment is due to the deficiency of effective demand, so that we fight this type of unemployment by boosting the level of effective demand. This can be done by raising the rate of investment or shifting the consumption function to the left.

To increase the rate of investment or to shift the consumption function to the left, the government can adopt the following measures.

(i) The government may decide to include the private investors to invest more. For this reason, the government may pursue a heap money policy of lowering the rate of interest. We know that the lower the rate of interest, the higher will be the level of private investment.

(ii) Alternatively, the government may encourage private investment by reducing taxes on profits so that the post-tax rate of profit will now be higher than before.

(iii) If inspite of all these measures, no adequate private investment is forth coming the government may try to boost private consumption by reducing the tax rates on incomes and commodities. The government may also offer direct subsidies to increase private consumption.

(iv) If all these measures do not lead full employment the government may itself decide to increase its investment by resorting to public works programme. This will offer additional employment to the factors of production which in turn will have the familiar multiplier effects.


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