IAI Actuarial Core Principles · Business Economics · Supply-side policies and their impact on businesses
A government reduces unemployment benefits and limits the legal power of trade unions to call strikes. Which statement best describes the expected effect and a possible drawback?
Cutting benefits and curbing union power increases labour market flexibility and incentives to take work, which may lower the natural rate of unemployment. The drawbacks are greater income inequality, job insecurity and possibly weaker consumer demand, and productivity gains are not assured.
- ALabour market flexibility rises and the natural rate of unemployment may fall, but income inequality and insecurity may increaseCorrect
- BWages become more rigid, raising the natural rate of unemployment, with no drawbacks
- CAggregate demand rises sharply because household incomes increase, with no effect on supply
- DLabour productivity is guaranteed to rise because workers are better trained
- The long-run aggregate supply curve shifts left because fewer workers are willing to search for jobs
Explanation
Lower benefits raise the incentive to search for and accept jobs, and weaker unions reduce wage rigidity, so the natural rate of unemployment may fall. The costs include greater inequality, job insecurity and possibly weaker demand. Productivity gains are not guaranteed since no training is provided.
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