Demand Management and Structural Unemployment in an Open Economy

The role of demand management policies is considered in an intertemporal model for a two-sector open economy with labour market imperfections causing persistent unemployment. Structural unemployment is shown to depend on demand management policies, although demand expansion need not in general lower unemployment. The implication of temporary and permanent changes in public demand for national wealth, unemployment and the trade balance are considered. Despite an inefficiently high level of unemployment and effectiveness of demand management policies, there is not in general a welfare case for pursuing such policies