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.
[sky]In modern market economy different economic forces act together and employment level is dependent on them. There are different types of unemployment like, seasonal, classical, cyclic, fractional, structural etc. with their respective causes. Some common causes are listed below.
• 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.
[linkunit]Monetary policy is the oldest policy for the economic stability. Central Bank adopted this policy to control the supply of money. All methods adopted by the central bank to control supply of money are called the monetary policy. Instrument of monetary are classified into Quantities and Qualities methods. The unemployment can be put off with the help of an easy monetary policy, In this connection, the central bank will reduce the bank rate, purchase government securities, reduce reserve requirements of commercial banks. All this will increase the loaning resources of commercial banks. In this way, the investments will increase and it results in level of employment will also move upward. But whenever an easy monetary policy is adopted to raise the level of employment, this develops inflation in the country. Therefore, the easy monetary should be used carefully.