Explain how a reduction in government spending could increase unemployment in the private sector

AQA A-Level Economics Paper 2 June 2021

Extract B (line 9) states: ‘The government spending cuts also severely damaged private-sector jobs.’

With the help of a diagram, explain how a reduction in government spending could increase unemployment in the private sector. (9 marks)

1. Unemployment is the number of people who are willing and able to work but can't find a job.

1. The government might reduce spending to reduce the budget deficit, which is the difference between government spending and tax revenue in a given financial year, or to reduce national debt.
2. For example, the extract mentions reduced spending on pensions.
3. This means that older people in society have reduced disposable incomes, leading to a fall in consumption.
4. Consumption is a component of aggregate demand.
5. As aggregate demand decreases, the economy contracts, as shown from y1 to y2, as less goods and services are being produced.
6. This leads to a fall in the derived demand for labour, leading to an increase in cyclical unemployment.

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