Unemployment, Fiscal Policy and Macroeconomic Objectives
This domain combines labour market problems with demand management. Examiners expect accurate definitions, correct unemployment-rate arithmetic, and evaluation of fiscal policy in a small open economy inside a monetary union.
Unemployment
- Types: frictional, structural, cyclical, seasonal, and disguised or underemployment common in smallholder agriculture.
- Rate = unemployed divided by the labour force, not the population. Discouraged workers leave the labour force and understate the problem.
- Costs: lost output, fiscal cost of benefits and lost tax, human capital erosion, social instability.
- In Cameroon, open unemployment is concentrated among urban youth and graduates, while underemployment and informality dominate; the Anglophone crisis has displaced workers and disrupted plantations.
Fiscal policy
- Instruments: government spending, taxation and transfers. Expansionary policy raises aggregate demand; contractionary policy reduces inflation or the deficit.
- Automatic stabilisers operate without decisions; discretionary policy requires deliberate action.
- Constraints: crowding out, import leakage, debt sustainability, and CEMAC convergence criteria on the budget deficit and public debt.
Macroeconomic objectives and conflicts
- Objectives: growth, price stability, full employment, balance of payments equilibrium and equity.
- Conflicts: growth can worsen inflation and the current account; reducing inflation may raise unemployment; redistribution may weaken incentives.
Worked example
Government spending rises by 100 billion XAF. The marginal propensity to consume is 0.8 and the tax rate is 0.25.
- Multiplier = 1 divided by (1 - 0.8 x 0.75) = 1 divided by 0.40 = 2.5.
- Predicted change in income = 100 x 2.5 = 250 billion XAF.
- If crowding out and import leakage absorb 60 billion, the net effect is 190 billion, so the simple multiplier overstates the outcome.
Traps that cost marks
- Dividing the unemployed by total population instead of the labour force.
- Treating every jobless person as unemployed; retirees and full-time students are not in the labour force.
- Confusing the budget deficit with the stock of public debt.
- Calling automatic stabilisers discretionary policy.
- Ignoring the fixed exchange rate, which means expansionary fiscal policy leaks heavily into imports.