According to classical economists there is always full employment in the economy. Neither ever raises unemployment nor there possibility of inflation. This is the reason, they believed in the operation of market forces and free enterprise system, except law and order like situation of the economy.
But during 1930’s Great Depression, classicists ‘utopia’ of full employment was shattered when millions of people were jobless and looking for jobs. Then it is being realized that government should interfere in economic life. Because there are many interrelated factors which start effecting due to one an other as rising price level, economic backwardness, deficit in BOP, unequal income distribution and unemployment are connected functions.
• Revolutionary change in Technology
• Change in trends
• Climate change
• Availability of substitution
In economics the solution of unemployment is tied with good economic conditions for which there are two approaches known as fiscal and monetary policy.
The Government can play a vital role to improve employment level, for this purpose government use fiscal policy. The instruments of fiscal policy are:
• Government Expenditures
• Taxes (Direct and Indirect)
• Deficit financing
• Transfer of Payments
The developing countries, due to population growth, shortage of resources etc. are clutched into the hands of unemployment and underemployment. To remove this situation, fiscal policy helps us. If government expenditures, on the basis of deficit financing, are increased and taxes are lowered, through multiplier effect NI will increase many a time. The multiple expansions in NI will have an impact on the level of employment. In this way, the easy fiscal policy will have the affect of raising employment. But, according to Phillips—there exists a positive relationship between employment and inflation. In other words, if we want to raise the level of employment, inflation will have to be restored.