THE LABOR MARKET AND UNEMPLOYMENT

What Is the Labor Market?

– The labor market refers to the supply of and demand for labor. Also known
as the job market, it's based on employees providing the supply and
employers providing the demand. It's a major component of any economy
and it's intricately linked to markets for capital, goods, and services.

KEY TAKEAWAYS

o The labor market refers to the supply of and demand for labor.
Employees provide the supply and employers provide the demand.
o The labor market should be viewed at macroeconomic and
microeconomic levels because each offers valuable insight into
employment and the economy as a whole.
o Unemployment rates and labor productivity rates are two important
macroeconomic gauges.
o Individual wages and the number of hours worked in an hourly wage
job are two important microeconomic gauges.
o The Bureau of Labor Statistics compiles detailed reports on national
and local labor markets in the United States.

Note: The supply of labor has outpaced the demand for it when productivity
growth outstrips wage growth.

The Labor Market in Macroeconomic Theory

 Wage growth lagging productivity growth indicates that the supply of

labor has outpaced demand, according to macroeconomic theory.
There's downward pressure on wages when this happens as workers
compete for a scarce number of jobs and employers have their pick of
the labor force.

THE BOTTOM LINE

 The labor market is an economic term for the availability of workers

and the cost of employment. It plays a major role in the overall
economy. The price for labor is largely determined by supply and
demand, as in other markets, but the labor market is also heavily
regulated in many countries.
MONEY, MONEY GROWTH AND INFLATION
MONETARY POLICY VS. FISCAL POLICY
 Monetary policy and fiscal policy refer to the two most widely recognized
tools used to influence a nation’s economic activity. Monetary policy is
primarily concerned with the management of interest rates and the total
supply of money in circulation and is generally carried out by central banks,
such as the U.S. Federal Reserve (Fed). Fiscal policy is a collective term for
the taxing and spending actions of governments. In the United States, the
national fiscal policy is determined by the executive and legislative branches
of the government.

KEY TAKEAWAYS

• Both monetary and fiscal policy are macroeconomic tools used to manage
or stimulate the economy.

• Monetary policy addresses interest rates and the supply of money in

circulation, and it is generally managed by a central bank.

• Fiscal policy addresses taxation and government spending, and it is

generally determined by government legislation.

• Monetary policy and fiscal policy together have great influence over a
nation’s economy, its businesses, and its consumers.

MONETARY POLICY

- Central banks typically use monetary policy to either stimulate an

economy or to check its growth. By incentivizing individuals and businesses
to borrow and spend, the monetary policy aims to spur economic activity.
Conversely, by restricting spending and incentivizing savings, monetary
policy can act as a brake on inflation and other issues associated with an
overheated economy.

The Fed frequently uses three different policy tools to influence the
economy:

• Open Market Operations: Open market operations are carried out on a

daily basis when the Fed buys and sells U.S. government bonds to either
inject money into the economy or pull money out of circulation.

• Reserve Requirements: By setting the reserve ratio, or the percentage of

deposits that banks are required to keep in reserve, the Fed directly
influences the amount of money created when banks make loans.

• Discount Rate: The Fed also can target changes in the discount rate, which
is the interest rate it charges on loans it makes to financial institutions. This
tool is intended to impact short-term interest rates across the entire
economy.

- Monetary policy is more of a blunt tool in terms of expanding and

contracting the money supply to influence inflation and growth and it has
less impact on the real economy. For example, the Fed was aggressive
during the Great Depression. Its actions prevented deflation and economic
collapse but did not generate significant economic growth to reverse the lost
output and jobs.

Contractionary vs. Expansionary Monetary Policy

Monetary policies can be either contractionary or expansionary.

Implementing one type of policy depends on the current economic climate
and the ultimate goals.
• Contractionary Monetary Policy: Central banks will use contractionary
monetary policies when inflation becomes a concern as the economy gets
overheated. In this case, prices rise as purchasing power drops.

• Expansionary Monetary Policy: This type of monetary policy is used to help

spur growth when can there’s a recession or slowdown. Expansionary
monetary policies have limited effects on growth by increasing asset prices
and lowering the costs of borrowing, making companies more profitable.

✓ Note: Monetary policy seeks to spark economic activity, while fiscal policy
seeks to address either total spending, the total composition of spending, or
both.

FISCAL POLICY

- Fiscal policy refers to the steps that governments take in order to

influence the direction of the economy. But rather than encouraging or
restricting spending by businesses and consumers, fiscal policy aims to
target the total level of spending, the total composition of spending, or both
in an economy.

The two most widely used means of affecting fiscal policy are:

• Government Spending Policies: Governments can increase the amount of

money they spend if they believe there is not enough business activity in an
economy. This is often referred to as stimulus spending. They can borrow
money by issuing debt securities (like government bonds) if there are not
enough tax receipts to pay for the spending increases, allowing them to
accumulate debt. This is referred to as deficit spending.

• Government Tax Policies: By increasing taxes, governments pull money out

of the economy and slow business activity. Fiscal policy is typically used
when the government seeks to stimulate the economy. It might lower taxes
or offer tax rebates in an effort to encourage economic growth. Influencing
economic outcomes via fiscal policy is one of the core tenets of Keynesian
economics.

- When a government spends money or changes tax policy, it must

choose where to spend or what to tax. In doing so, government fiscal policy
can target specific communities, industries, investments, or commodities to
either favor or discourage production—sometimes, its actions are based on
considerations that are not entirely economic. For this reason, fiscal policy is
often hotly debated among economists and political observers.

Contractionary vs. Expansionary Fiscal Policy

Governments can execute their fiscal policies through contractionary or

expansionary measures:

• Contractionary Fiscal Policy: Governments can turn to contractionary

measures to slow down the economy and curb inflation. These steps include
raising taxes and reducing government spending. It isn’t uncommon that a
recession follows to bring balance back to the economy.

• Expansionary Fiscal Policy: This is commonly done during recessions to

encourage people to spend. Governments often turn to measures like
stimulus checks issued to taxpayers. They may also increase government
spending as a way to boost employment. Expansionary fiscal policies are
commonly associated with deficit spending.
FAST FACT: In comparing the two, fiscal policy generally has a greater impact
on consumers than monetary policy, as it can lead to increased employment
and income.

KEY DIFFERENCES

While the overall goal of monetary and fiscal policy is generally the same—to
influence the economy—there are inherent differences between the two.

✓ Among the key differences between monetary and fiscal policy is the party
responsible for carrying them out. Monetary policy is carried out by a
nation’s central bank, such as the Fed in the U.S., the Bank of Canada (BOC),
and the Bank of England. Fiscal policy, on the other hand, is the sole
responsibility of a country’s government.

✓ The tools that are used are also distinct between the two. While monetary
policy relies on open market operations, reserve requirements, and/or the
discount rate, fiscal policy involves the use of government spending and/or
changes in government tax policies.

What’s the Difference Between Monetary and Fiscal Policy?

Monetary and fiscal policy are different tools used to influence a nation’s
economy. Monetary policy is executed by a country’s central bank through
open market operations, changing reserve requirements, and the use of its
discount rate.

Fiscal policy, on the other hand, is the responsibility of governments. It is

evident through changes in government spending and tax collection.
Is Monetary or Fiscal Policy Better?

That depends on who you ask and the type of policy implemented. When
central banks lower interest rates by using monetary policy, the cost of
borrowing and investment becomes cheaper. This allows consumers to
assume more debt and make large purchases. Businesses are also able to
invest in their growth.

Fiscal policy, on the other hand, helps increase gross domestic product (GDP)
through expansionary tools. This occurs because demand for goods and
services increases, which leads to a rise in prices and output.

THE BOTTOM LINE

Both fiscal and monetary policy play a large role in managing the economy
and both have direct and indirect impacts on personal and household
finances. Fiscal policy involves tax and spending decisions set by the
government, and will impact individuals’ tax bill or provide them with
employment from government projects. Monetary policy is set by the central
bank and can boost consumer spending through lower interest rates that
make borrowing cheaper on everything from credit cards to mortgages.