Question

Imagine that you are the economic adviser of a country which experiences a high unemployment rate for a long time. The government (does not know the economic theory) and is willing to implement the following policies in order to reduce the unemployment rate. The first on is to reduce the minimum wage. The second one is to increase the unemployment benefits. Discuss the two policies and their effect (rely on the theory you have learnt) and ultimately advise the government on what to do.

Answer 1

Reducing minimum wage is an advisable policy for reducing unemployment rates. As it makes the employing cheaper for business. The cost of labour decreases resulting in lower cost of produce. Demand can increase because of lower cost which can further increase employment as more supply is needed. So reducing minimum wage is an effective step for reducing unemployment rate.

The second policy of increasing unemployment benefits although will have social benefits but it is not helpful in reducing unemployment rates. Such increase in benefit will further increasing minimum wages as workers will seek more wages for working as they receive more for being unemployed. So this policy is not suitable.