Unemployment gap

Unemployment gap is an important concept in fiscal policy. An unemployment gap means that the gross domestic product is lower than it should be for the country to achieve full employment.

An unemployment gap shows how much demand needs to increase for a country to achieve full employment. Fiscal policy should try to reduce the unemployment gap to reach the goal of full employment. The government can increase public spending which represents endogenous (not dependent of GDP) contribution to the economic circulation.

An increase in government spending generates multiplier effects, which means that demand increases more than the public expenditure growth. Another alternative to decrease an unemployment gap is to lower taxes to boost demand in the economy, taxes are exogenous (depending of GDP) leakage. A tax cut will increase the multiplier effects in the economy.