Chapter 10 Flashcards
Defn. Labour Force/ working population/ economically active population
The labour force of a country is made up of those who are employed and those who are unemployed but are actively looking for a job.
Defn. Unemployment
the situation in which labour who are willing and able to work cannot find work
Defn. Full employment
the situation where job seekers who are willing and able to work can find jobs (i.e. there is no involuntary unemployment.
- occurs at Yf
- no Demand Deficient unemployment, although Frictional and Structural unemployment may exist -> called the natural rate of unemployment
Defn. Demand deficient / cyclical unemployment
arises from insufficient AD, which may be caused by business cycles as well as economic shocks
Cause of demand deficient unemployment
- … components of AD decrease
- The initial fall in AD from AD0 to AD1, from figure 3, will cause an unplanned rise in firm’s inventory
- To maintain their inventory, firms will cut down production. They will employ less resources such as labour.
-This results in cyclical Un. - As more labour are retrenched, they receive less in wages. The fall in purchasing power of the labour force would lead to multiple fall in induced consumption. The multiple fall in induced consumption results in multiple leftward shift in the AD curve from AD1 to ADn. Through the reverse multiplier, the overall fall in AD has resulted in multiple fall in real GDP from Y0 to Yn
- The fall in production of goods has led to a fall in derived demand for labour, leading to a rise in demand deficient Un
Cause of cyclical unemployment example
- The Covid-19 pandemic has caused demand deficient Un to rise in many countries.
- At the peak of the pandemic, businesses were forced to close temporarily. This would lead to the fall in investments
- Simultaneously, consumers who were self-quarantining or following stay-at-home orders were buying fewer products. This led to a fall in consumer expenditure
- The fall in investment and consumer expenditure resulted in a fall in AD and hence a rise in cyclical unemployment
Defn. Structural unemployment
arises from the mismatch of skills between the unemployed and employers. This mismatch arises due to changes in the structure of the economy. The structure of the economy can change due to changes in the method of production or changes in the types of goods being produced
Cause of skills mismatch (structural unemployment)
- Increased globalisation
- offshoring: relocation of production overseas -> occupational and geographical mobility
- Emergence of low cost producers - Technological advancements
- acts as a substitute to labour - Economic restructuring
- SG has experienced a structural shift away from the manufacturing sector to service sector - Lack of effort to facilitate training
- employers are profit seeking and are concerned over their self-interest - Relocation of factories to other regions in the country
*Link: Occupational/geographical immobility would prolong structural Un
Cause of structural unemployment example (Singapore’s Hard disk industry)
- From 1997 to 2004, about 35% of the world’s hard disks were made in Singapore. Hard disks are part of the electronics industry. In early 2000s, electronics accounted for 48% of domestic exports.
- However, the emergence of India and China which had relatively lower production cost, made Singapore less competitive as a manufacturing base. - Electronics engineers in Singapore found themselves structurally unemployed as hard disk firms took their plants to low-cost China and India.
- Some workers were too old to learn new skills and had problems finding new jobs that could fetch them an equivalent pay.
- Workers would remain structurally unemployed until they are able to pick up relevant skills
Defn. Frictional unemployment
arises as time is required for job seekers to look for suitable jobs and employers to look for suitable workers because of information imperfections in the labour market
(type of short-term unemployment)
Causes of frictional unemployment
- Job transition arising from employee dissatisfaction and career transition
- Job seekers who are re-joining the workforce
- Generous unemployment benefits (SG don’t have)
*Link: The lack of information on the availability of jobs would prolong frictional unemployment
Consequence of unemployment on households
- Fall in material and non-material standard of living
- workers who lose their jobs do not have income from work, while workers who retain their jobs will be earning lower wages. Overall the fall in households income from OWoAQo to OW1BQ1 would reduce their purchasing power. The reduced ability to buy goods and services would lead to a fall in mat SOL, ceteris paribus
- physical health. high levels of stress that come with being unemployed -> conditions -> non-mat SOL
- strong correlation between crime rates and Un. Studies show that countries face higher crime rates as well as domestic violence with higher unemployment. This would adversely affect the quality of life for everyone -> non-mat SOL
Consequences of unemployment on firms
- Fall in potential growth and SOL
- prolonged levels of unemployment -> workers choosing to leave the labour market permanently because they have lost the motivation to search for work. -> falling quantity of labour -> decrease LRAS -> reduce full employment level of RNY or potential growth -> fall in LRAS reduces country’s SOL because less goods and services would be avail - Fall in actual growth
- prolonged unemployment could alter the expectations of households and firms -> reducing Actual growth - Widening income gap
- structural Un -> usually leads to higher DD for high-skilled workers and lower DD for low-skilled workers -> widens income gap between high and low -> rising income inequality
Consequences of unemployment on govt
- Worsening govt’s budget balance
- unemployed citizens do not have income so don’t pay personal income taxes -> decrease tax revenue
- higher Un -> overall spending of population is lower -> tax rev from indirect tax lower
- rise in govt expend. on unemployment benefits -> prolonged Un -> budget deficit
-> foreign investors hesitant in committing their investments in the country -> reduce actual and potential growth
Remedies for cyclical unemployment
- Expansionary FP
- Expansionary MP
- ERP - depreciation
focussed on increasing AD. when AD increases from AD0 to AD1, the production of goods and services rises, i.e. RNY rises from Y0 to Yf. As labour is a derived demand, the rising production would increase the demand for labour. This translates into lowering cyclical Un.
