Fiscal and Monetary Measures to Correct Unemployment in Czech 
Republic (2013-19)

                                                             Abstract

Unemployment is one of the major macroeconomic variables that have a great effect on the economy. The whole economic thought of the Keynesians was to tackle this important variable. Czech Republic implemented demand-side policies in an effective way after 

understanding the economy, which resulted in a great fall in unemployment figures and 

increase in output. Sectoral analysis and effective use of demand-side tools were the reason for the success of the economy.

Keywords: Unemployment, Czech Republic, Demand-side Policies.

                                                             Introduction

Czech Republic has one of the lowest unemployment rates today in comparison with other developed and emerging countries. There are various factors that keep this figure low to keep the country economically flourished. Czech Republic experienced high unemployment rates 

in the first half of the decade (2010-2015) due to certain causes. Old age unemployment was 

high with people retiring at an earlier stage and youth employment surged at a very high rate. 

Health conditions also worsened increasing old-age mortality rates. Female labour force 

participation rate was very low in this time period. All these variables combined with a few 

more causes contributed to the unemployment crisis in the country. Effective fiscal and 

monetary tools were used to tackle this situation, improving aggregate demand in the country. 

Government spending on a sectoral basis and gradual push to the quantity of money in the 

economy by the central bank were key moves that improved the situation.

            Fiscal and Monetary Policies in Czech Republic to Reduce                                                   Unemployment

The government of Czech Republic identified fiscal measures to be very effective in the 

economy to increase output and employment. Average income tax rates and corporate tax rates are fixed in the country at 22 percent and 19 percent respectively. People had a stable 

disposable income figures till 2012, but unemployment reduced gross income in the nation for the initial part of the decade. The economy was optimized with government spending used as an effective fiscal tool, holding tax rates unchanged. The fiscal move to increase government spending to the economy was funded by stable tax income, increased money supply (printing new money) and selling bonds. 

Youth unemployment raised to 22 percent in the economy which was one of the highest figures in the European union. Simultaneously, the total labour force participation also dropped to very low levels in 2012-13. It was found that there was cyclical unemployment in the country where industries and services, which contribute to almost 95 percent of the economy, was going through a slow-moving slump phase. Industries like automobile, iron and steel production faced a surge in input prices and fall in demand. Financial sector and the manufacturing sector slumps caused high cyclical unemployment in the country. The government increased spending on subsidies to private firms. Anticipating that the slump would last for a short period and the major industries of the nation will regain its demand, the government subsidized major firms to fund labour costs and pay basic wages to workers. Simultaneously, they increased average minimum wage levels in the economy to motivate the population and increase the size of the labour force, and thus labour force participation rates. Part-time workers and seasonal workers in the country entered the full-time labour market in industries. Initially, workers received low wages but as the business cycle and the economy recovers, the ‘insiders’ enjoyed high wages and living standards in the country. Another aspect of Czech Republic’s government spending is to develop skills for the youth and increase health standards in the country. Education expenditure was increased (spent on skill development) to 5.7 percent of the Gross Domestic Product (GDP) in 2016 from 3.9 percent in 2013. The skill education expenditure was effective as more start-ups and number of skilled workers increased in the economy. This move helped the government to reduce unemployment by substantial figures. On the other side, heath expenditure dropped continuously from 2004 to 2014. The government increased spending on health (% of GDP) from 2014 to 2019, which decreased death rates, increased retirement age and therefore expanded the labour force employment rate. Levels of education Expenditure and retirement ages of the country are shown below.

                                                                                   Figure 1

                             (Education Expenditure in Czech Republic, Source – World Bank)

                                                                                  Figure 2

Retirement Ages in Czech Republic, Source – Government of Czech Republic (Department of Social                                                                           Security Administration)

Czech Republic’s increased Government expenditure was very effective in reducing unemployment levels. However, the impact of reducing unemployment is not completely because of fiscal tools. The Central Bank increased money supply in the economy by printing new money to fund government expenditure and also to increase Money demand with a multiplier effect. To tackle unemployment in the country, Interest rates were also pushed to the bare minimum along with a boost in money supply. Although money supply was increased substantially in the economy, it could be established that Fiscal tools were more effective in correcting unemployment and output than monetary tools. This can be analysed by the IS-LM framework. The levels of government expenditure, money supply, Gross Domestic Product (GDP) and unemployment rates are shown below for clear understanding. These representations and figures explains the effectiveness of demand-side policies to correct output and employment, in line with the Keynesian idea. Effective demand side policies has helped Czech Republic to increase output and reduce Unemployment.

                                                                                 Figure 3

                       Government Expenditure in Czech Republic, Source – Czech Statistical Office

Figure 4

Money Supply in Czech Republic. Source – Czech National Bank

Figure 5

Unemployment in Czech Republic, Source- Czech republic Ministry of Labour and Social Affairs

Figure 6

(GDP of Czech Republic, Source – World Bank)

The IS-LM Framework and Demand-side Policy Effectiveness

The fiscal policy effects represented by the IS curve, and the monetary policy effects represented by the LM curve has different effects on the economy depending upon their slopes. IS curve’s slope determinant is the relationship between interest rates and investment in the economy whereas LM curve’s slope determinant is the relationship between interest rates and money demand in the economy. Interestingly, Czech Republic observed a very irresponsive effect of investment to interest rates. Gross Fixed Capital Formation (GCFC) and interest rates in the country, had a very inelastic relationship.

                  Figure 7

                     (GCFC Current US$, Source – World Bank)

Figure 8

(Interest rates in Czech Republic, Source – Czech National Bank)

A highly fluctuating interest rate dynamics in the country resulting in very small effect on investments as shown by the representations. This explains why the IS curve of Czech Republic is steep and irresponsive. The interaction between the steep IS curve and an average LM curve is shown below.

Figure 9

Effects of Simultaneous Fiscal and Monetary Policy on IS-LM Framework

The Government’s policy action to increase government expenditure to reduce unemployment shifts the steep IS curve from IS to IS’. Along a relatively flatter LM, the output increases by a greater effect and there is a increase in interest rates. But since, money was pumped into the economy by the central bank to fund government spending and increase money demand, the flatter LM curve also shifts to right along the steep IS curve (IS’). The final effect of the fiscal and monetary policies increased output by a great amount from Y’ to Y”, and reduced the interest rate to r”. This situation in the economy is similar to the Early-Keynesian idea after the Great Depression. These measures reduced unemployment drastically and increased output in the economy. In the contribution towards increasing output and reducing unemployment, Fiscal action of increasing government expenditure had a greater effect than increasing money supply. As explained, this is due to interest elasticity of investment and money demand, determining the slopes of the IS and LM curves respectively.

Conclusion

Czech Republic is one of the best countries to tackle unemployment effectively. They hold records along with a few other countries to have the lowest unemployment rates in the last 5 to 6 years. Fiscal effectiveness is very high in the country in the form of government spending. Sectoral analysis and spending in the ‘right’ segments of the economy has enabled the country to deal with issues through impactful demand-side policies. Monetary policy of increasing money supply for ‘seigniorage’ or to help in funding of government expenditure as a major attribute of monetary policy has proven to be fruitful in Czech Republic. Tax rates are untouched and very anticipated by individuals in the economy, making them possess high disposable income levels and take effective, clear decisions. Overall, the country has proven to be one of the best governments to tackle unemployment and retain good economic growth rates.

References

Czech Republic Ministry of Labour and Social Affairs (Unemployment statistics and 

representations), Retrieved from https://www.czso.cz/csu/czso/ministry-of-labour-and-social-affairs

Czech National Bank (Interest rates and Money supply), Retrieved from https://www.cnb.cz/en/statistics/

Czech Statistical Office (Government Expenditure in Czech Republic), Retrieved from https://www.czso.cz/csu/czso/home

Department of Social Security administration (Retirement age in Czech Republic), Retrieved from https://www.czso.cz/csu/czso/social-security

Maitah, Mansoor & Urbánková, Erika. (2015). Economic Performance and Unemployment in the Czech Republic. Asian Social Science.

World Bank Database (GCFC, GDP and education expenditure of Czech Republic), Retrieved from https://databank.worldbank.org/