[PDF Notes] What are the limitations of the employment generation argument?

Protection reduces imports, stimulates economic activity and increases employ­ment. This argument was very popular during 1930’s (i.e., the period of Great Depression).

Expansion of employment occurs through two effects, i.e., the multiplier effect and the acceleration effect;

(a) Imports form a leakage in the domestic income stream. When imports are reduced through protective measures and exports are maintained, foreign trade multiplier operates which leads to an increase in income and employment by a multiple of reduced import expenditures,

(b) There will be expansion of employment and income in other sectors. The overall increase in employment and income needs more capital. Hence investments in capital goods will rise which will further stimulate investment, income and employment through acceleration effect.

The employment generation argument has the following limitations:

(i) The employment expansion argument is based on the assumption that there exists excess capacity in the economy.

(ii) Protection can be an effective device for expanding employment only if exports can be maintained at the previous level and there is no reduction in exports through retaliation by other countries. But the assumption of no retaliation is highly unrealistic in practice.

(iii) Since imports pay for exports, therefore curtailment of imports through tariff will lead to an equal reduction in exports. Thus, additional employment created in the protected industries will be neutralised by the reduction in employment in export industries due to fall in exports.

(iv) If the demand for imports is highly inelastic, protection will not be able to reduce imports appreciably and thus will fail to have the desired employment expansion effect.

(v) Less developed countries face widespread disguised unemployment which cannot be removed through protection.

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