Analyse the meaning of unemployment to derive a clearler comprehension of its causes and effects on the economies prepared by our JC Economics Tutor Simon Ng from Economicsfocus. The pursuit of full employment condition is one of the major aims of governments that entails many benefits, like social and political stability. Additionally, find out how governments from various countries have achieved higher employment, such as emphasis on upskilling.

economics tuition notes definition


What is unemployment?

-Refers to all individuals who are able and willing to work but not offered a job.

What is unemployment rate?

-The ratio of unemployed people to the labour force/active working population.

-Unemployed people are individuals aged 15 and above who are unemployed but are willing and able to work.

What is labor force?

-Refers to both employed and unemployed individuals (aged 15 and above) that are willing to work

What is active working population? What is working population? What is working age population?

-Refers to all individuals, above 15 years of age, who are able and willing to work and are employed.

What is labor participation rate?

-Conversion of inactive working population into active working population.

-Proportion of labour force that are employed.

. What is inactive working population? What is economically inactive labor force?

-Refers to the portion of the labour force who is not working, does not have a job to return to, and are not looking for a job.

-E.g. Full-time students, housewife, the disabled, etc.

What types of unemployment are there?

-Demand-deficient / cyclical unemployment

-Frictional unemployment

-Structural unemployment - Technological unemployment, Sectoral unemployment

-Regional unemployment

-Seasonal unemployment

What is the equilibrium level of unemployment?

-This occurs when the labour market is in equilibrium but some workers of the working are unwilling or unable to find work at the current wage level despite the fact that DDL is equal to SSL

. What is disequilibrium level of unemployment?

-This occurs when there is an excess labour supply where the supply of labour does not equal to the demand for labour as the workers are unwilling to settle for lower wage rate.

What is the natural rate of unemployment?

-Due a combination of frictional and structural unemployment, the labour market will experience a condition of unemployment at a particular level of inflation rate. This rate of unemployment can exist even when the labour market demand equals to the labour market supply.

What is demand-deficient unemployment? Why is cyclical unemployment?

-Demand-deficient unemployment occurs as a result of a fall in demand for labour caused by an economic recession under a condition of wage inflexibility where there is ‘stickiness’ in real wage rates as workers are unwilling to accept lower wages, stated by Keynes. (difficult to adjust downward)

What is frictional unemployment?

-It occurs as result of poor information in the labour market which makes it difficult for workers to find employment and thus creates a time lag before workers find suitable jobs.

What is sectoral unemployment?

-Sectoral unemployment occurs when there is a change in pattern of demand and change in cost competitiveness within a particular sector of the economy

-Change in competitive advantage

What is displacement of workers?

-A replacement of a batch of workers due to certain reasons

What are the various types of structural unemployment?

-Sectoral unemployment

-Technological unemployment

What is structural unemployment?

-Structural unemployment is caused by the changing pattern of demand and/or supply in the economy as a result of sectoral adjustment, technological advancement, imperfect labour market and seasonal adjustment of production period.

What is regional unemployment?

-This form of unemployment occurs when a certain region experiences full employment but another region has unemployment.

-This is due to occupational and geographical immobility between regions of a country which occurs as certain regions are no longer able to attract investment to provide employment due to poor investment environment and higher wage rate.

What is technological unemployment?

-Technological unemployment occurs as a result of a change in production techniques, usually with the introduction of new technology

-Rise in Productivity lead to fall in dd for labour (displacement of workers due to use of capital) due to skill incompatibility (new technology)

What is seasonal unemployment?

-It is caused by relatively regular and anticipated decline in business activity during a certain time period of the year.

How to increase labor participation rate?

-Provide more financial and social support to encourage female workers to join the labour

-Shorten the training and development process to allow new workers to enter the labour market at an earlier stage

-Extend the retirement age to sustain labour supply

-Reduce unemployment benefit/For Singapore, the government uses incentive (workfare) to encourage labour participation

What are the negative impacts of unemployment?

- Rise in opportunity of idle resources seen in term of loss of production and the need for more funding to finance the introduction of unemployment benefit.

- Increase in cost of government expenditure

- National income will be lowered which will lead to a reduction in real per capita income

- Unemployment will also create social instability as illegal activities and crime rate will rise

- Unemployment will also lead to unequal distribution of income as the excess labour supply will drive wage rate downwards, lowering the income of the workers and this will lead to social dissatisfaction

- Unemployment will undermine the economy's production capacity as resources are under-utilized

- Unemployment is also an indication of the loss of competitiveness as the economy may cut production and reduce employment as it cannot sustain their comparative advantage in export demand and inflow of investment into the economy the economy.

Why should the government keep unemployment rate low?

-Reduce opportunity cost of idle resources

-Present budget deficit/strain – rise in unemployment rate benefit/fall in tax

-Increase production capacity

-Maintain a high SOL (more people have income to spend/tight labour market will lead to rise in wage rate)

-Prevent unequal distribution of income – to maintain social stability

-Raise tax revenue to provide financing for infrastructural and institutional development

-Ascertain competitiveness

Why is low unemployment more important than other aims?

-Unemployment may reduce the production capacity needed to propel economic growth as there is under-utilization of resources

-Unemployment may not enable the people to overcome inflation due to lower purchasing power or lack of income

-Unemployment may create inequality of distribution of income

-Curbing unemployment is more critical than curbing inflation

Why are other aims more important than low unemployment?

-External disequilibrium is likely to affect unemployment rather than the other way round

-Fall in Xd - fall in production - fall in Investment - increase in unemployment (Singapore is dependent on Xd/FDI for production which will create cyclical unemployment when there is adverse global economic downturn (as the economy tries to increase production, it will induce increase in demand for resources and the rise in cost-push inflation)

-Exchange rate fluctuation due to the fluctuation in flow of capital - unstable external prices - undermine trading activities, investment, external debt - undermine production - undermine employment

-Excessive focus on unemployment may lead to excessive inflation - fall in real wage of workers - may not encourage work efficiency - no real increase in output

-Focus on high economic growth – will lead to structural unemployment as the economy focuses on high-valued production, which is capital-intensive and technological-based. Consequently, skill incompatibility and displacement of workers will occur as a result of technological advancement and sectoral advancement.

What are the possible solutions to curb unemployment?

-Expansionary fiscal policy

-Expansionary monetary policy

-Supply-side policy

-Wage flexibility

What are the solutions to curb structural unemployment? What are the supply-side policies to curb structural unemployment?

-Infrastructural development

-Manpower development

What are the limitations of solutions to curb structural unemployment?

-Workers are not receptive to retraining and upgrading.

-Employers may not want to spend money on retraining/upgrading the skills of their workers as workers may job-hop after training.

(difficulty in retaining training benefits)

-High cost in adjusting the structure of the economy (increase in taxation – politically unfavourable/may increase government debt)

-Inherent constraint- limited resources

-Time lag –unable to solve unemployment in short run

-Depends on efficiency of public bodies

-Saturation of infrastructural development; because of maturity of economic development

What are the solutions to curb demand-deficient unemployment?

-Expansionary Fiscal Policy

-Inducing more investment and export demand through raising efficiency and expansion of resource capacity. (fall in COP to induce profit-increase investment-raise production-increase employment) – Long-term solution

-Infrastructural development will raise production and create employment to compensate the loss in production due to fall in external demand (increase in government expenditure will raise aggregate demand, via the multiplier effect which will raise production and employment) – Short-term solution

What are the solutions to curb frictional unemployment?

Institutionalization effort has been introduced to eradicate the market -imperfection and employment hindrances, so as to facilitate information about the labour market. E.g. Work Development Agency (WDA)

-Better job information. This could be provided by government centres, by private employment agencies, or by newspapers.

-Reduce the level of unemployment benefits. This will make the unemployed more desperate to get a job and thus prepared to accept a lower wage

-Can use workfare to encourage more workers to work

What are the limitations of solutions to curb frictional unemployment?

-Costly to set up and run such agencies.

-Government agencies -Tax payers' money

-Newspaper: cost money to advertise so some do not advertise

-Clear definitions of jobs needed and most times not available leading frustrations and distrust etc

How can monetary policy curb unemployment?

-In an expansionary monetary policy, the central bank will increase the money supply through the quantitative or qualitative monetary tools so as to lower interest rate which will lead to lower cost of borrowing. This will lower the cost of credit consumption which will induce higher level of consumption while the cost of borrowing will make investment more profitable, leading to higher level of investment. Consequently, there will be a rise in aggregate demand which will induce rise in national income and production via the multiplier effect. This will lead to higher level for employment in term of demand for labour resources.

How effective is monetary policy in curbing unemployment?

-Able to induce more permanent source of employment as it induces market-based investment

-Can induce more efficient and innovate production due to market-based economic activities as seen in R&D based industries

-Can create stabilizing effect on the industries due to liquidity provided through monetary policy

-Provide a greater variety of employment for investment in new industries

-Its strength lies in its impact on the influence on the level of investment which is a critical source of employment

What are the limitations of monetary policy in curbing unemployment?

-Inability of the government or central bank in controlling money supply due to liberalisation of the banking system and the influence of inflow of hot money (difficult for the economy to set capital control)

-Inelastic MEI – Investment is based on FDI and low interest rate will not lead to rise in FDI as local interest rate does not affect FDI

-Small multiplying effect – undermining the MP from expanding the economy (high MPM and MPS)

-Increase in local investment may not be able to compensate the loss in production due to fall in external demand (70% of the production in Singapore is directly or indirectly linked to external demand)

How can fiscal policy curb unemployment?

-The expansionary fiscal policy will increase the aggregate demand by raising government expenditure and lowering taxation which will contribute to the rise in the national income that will raise the production level, leading to rise in employment. Through the building of infrastructural development and provision of public services, production of goods and services will lead to more employment

-Lowering of taxation will induce investment which will lead to more production and thus, solving demand deficient unemployment.

How effective is fiscal policy in curbing unemployment?

- Direct impact on production and thus, can raise employment directly through the provision of more public services and the development of infrastructure

- Have a dimensional effect

- can raise the income of lower income group and improve standard of living / it will also raise the efficiency of these industries which can be achieved through government spending on infrastructural and manpower development

What are the limitations of fiscal policy in curbing unemployment?

-The provision of government expenditure will increase government debt and taxation if it requires financing (sovereign debt)

-The amount of increase in government expenditure cannot compensate the fall in production due to the fall in FDI and export demand.

-Time lag

-Crowding out effects occurs due to excessive government borrowing, which will create a contractionary effect on the expansionary fiscal policy as Investment will fall The level of investment will decrease as the cost of borrowing is higher and there is deprivation of fund for private investment – (weak planning by the government will undermine the effectiveness of the fiscal policy) borrowing)

-Excessive infrastructural development will create redundantly for the public facilities

-Efficiency of the government

How can wage flexibility system curb unemployment?

-The introduction of the wage flexibility system (fixed and variable wage) will help the firms to cut down production cost so as to dampen the effects of rising cost condition and thus, prevent business failures. This will lower down the possibility for firms to conduct retrenchment. Such a policy will raise the level of employability for the workers.

How can infrastructural development curb unemployment?

-New industries are also developed with infrastructural development to provide more employment opportunities to help workers who are retrenched as there will be direct increase in production capacity. Furthermore, the infrastructural development will also raise the physical mobility of workers which will solve regional unemployment due to structural rigidities.

-In the short term, the implementation of infrastructural development will raise production and create employment to compensate the loss in production due to fall in external demand (increase in government expenditure will raise aggregate demand, via the multiplier effect which will raise production and employment.

What is Job Credit Scheme?

-The recent introduction of Job Credit Scheme (form of Fiscal Policy) also aims to lower down the cost of wages so as to encourage the firm to sustain employment. (part of fiscal policy leads to a fall in cost of production [subsidy to the firm. 12.5% of wage up to 2500]

How can manpower development curb unemployment?

-Raise the productivity of the workers with skills development through a constructive and efficient training system – overcome skill incompatibility and displacement of workers

How effective is manpower development in curbing unemployment?

-educational level of the workers must be at a certain level

-cost of training and availability of facilities and trainers

-difficulty in retaining training benefits

How effective is infrastructural development in curbing unemployment? What are the limitations of infrastructural development in curbing unemployment?

-source of funding - budget strain

-problem of white elephant and rise of corruption