Why Is A High Level Of Employment Typically A Microeconomic Policy?

The Government has a strong incentive to maximise the size of the labour force and ensure that as many people are working as possible. Fiscally it is more beneficial because tax revenues increase during periods of high employment, as the Government has more people earning and therefore it receives more tax receipts. Low levels of unemployment would result in reduced social security payments which can be more beneficially spent elsewhere in the economy.

If there are more people working then the economy is closer to the production possibility frontier, which results in people earnings increasing and there being and there possibly being a wider range of goods available in the economy. These factors may also result in higher rates of growth in the economy over time, as the higher levels of demand in the economy may encourage firms to innovate to maximise their profit potential in the larger economy.

Frictional and structural unemployment and hysteresis can result in huge social problems. People out of work encounter huge stresses in attempting to find new employment, as they feel worse about themselves and are concerned about their declining standard of living. This can also result in crime because some people may consider it an easier option. This can be especially true for individual areas, with the decline in an industry or service predominantly effecting the same social classes or skills groups. In some cases if they live close to each other in an area such an economic decline could increase crime levels significantly.

Employment is usually considered on a macroeconomic rather than a microeconomic level to deal with unemployment. It is considered more cost and time effective to alleviate structural and frictional problems with job centres and work schemes or tackle persistent unemployment through the whole economy. The microeconomic response would have to address individual markets and it would probably be a lot more difficult and inefficient to correct than a more general macroeconomic policy.

This article was written by Jonathan McHugh in June 2005