JC Economics Essay Series #90 – High Unemployment & Negative Consequences

JC Econs Essay High Unemployment & Negative Consequences Model Answers 

According to macroeconomic theory, there are 4 main types of unemployment – cyclical, structural, seasonal and frictional unemployment. In reality, these are not measured easily or directly, and not always observable. They can often overlap, and it’s sometimes unclear it one is unemployed, or have exited the labour force entirely.

For sure, there are significant negative consequences when unemployment is high, over the natural rate of unemployment (NAIRU or NRU), about 4-6%. Of course, in any economy, the right answer to unemployment is to create more jobs.


(a) Explain why governments around the world should be concerned with the different types of unemployment.
(b) In any economy, the right answer to unemployment is to create more jobs. Discus. [15]


Macroeconomic Problem of High Unemployment

Unemployment refers to a situation where people in an economy who are of legal working age, and are willing and able to work at the current wage rate, are unable to find work. Whether unemployment is a concern depends on the severity of situation and types of unN.


Cyclical unemployment, also known as demand-deficient unemployment, is related to the business cycle, during the downswing (recession or depression), aggregate demand falls and firms find they cannot sell all their current output, and stocks pile up. Firms will then adjust to the deficiency of demand by cutting back on production and reduce workers, leading to unemployment. an increase in cyclical unN.


Sometimes job vacancies and unemployment coexist. The reason is that unemployed workers often do not have the skills demanded by employers. Structural unemployment arises when changes in technology international or competition change the skills needed to perform jobs or change the location of jobs. People are made redundant in one sector of the economy cannot immediately find jobs elsewhere because they either do not have the necessary skills or unwilling to move to another area/region where prospects are better (occupational and geographical immobility of labour respectively). 


Frictional unemployment arises because of imperfect information in the labour market as it takes time for workers to be matched with suitable jobs. It is also known as search unemployment. The unending flow of people into and out of the labour force and the process of job creation and job destruction create the need for people to search for jobs and for firms to find suitable employees. Since both employers and employees spend time searching what they believe will be the best match available, frictional unemployment arises.


Policy makers are not that concerned with frictional unemployment. Frictional unemployment usually does not last long. Sometimes this is good for the economy because a better match between workers and jobs after some deliberation would mean the economy becomes more efficient. So to achieve low unemployment rate, the focus is to keep structural unemployment low and cushion the negative impact on employment during business downturn. Similarly, seasonal unN is voluntary and not significant and , so the gov is not that concerned with it.


High unemployment imposes significant costs on the economy.

Loss in Production and Income: The loss of jobs brings about reduction in production and income. As a result, purchasing power may be reduced and hence standard of living is lowered. With unemployment, the economy’s actual output may be significantly less than its potential output.

Loss in Human Capital: Prolonged unemployment may cause a person to lose touch of the skills and knowledge he once possessed. If they stay out of the job market for too long, they may face increasing competition with the fresh graduates whose human capital are intact and are also cheaper to hire. In addition, workers without regular employment not only lose their financial security, if for long periods, they will suffer from loss of self-esteem, stress, discouraged and demoralised which often result in suicides and mental illness. The loss in human capital lowers the economy’s productive capacity affecting potential growth.

Loss in Tax Revenues: The government loses tax revenues due to the loss in income since the unemployed can no longer pay income tax. They are also more prudent in their spending, so there will be less collection of indirect taxes. Moreover, the government needs to spend on welfare payments. This causes a strain on the government’s reserves. In serious cases like US, it has implications on government’s expenditure to help the ailing economy.

Loss in Social Stability: Unemployment appears to be linked to a greater incidence of crime, violence on streets, drug abuse, alcoholism and vandalism. This may have adverse impact on investment decisions and hamper economic growth.
(Qn: how can these adverse impacts be improved?




Econs Tuition teacher’s Remarks:
1. There was no introduction, or definition of unemployment was not accurate. 

2. There were some students with serious misconceptions and inappropriate approach used by some students. For example a handful of students treat the question as a whole 25-marks question and did not label part a or b. This is inappropriate as although they are linked, the marks are allocated separately. Students who explained the costs of unemployment and then justify that unemployment is a concern when it is high and due to cyclical and structural reasons scored well. The best answers also gave appropriate exemplification. Quite a number of students chose to explain some costs of unemployment under the various types of unemployment. Very often this approach gave the impression that those costs only applies to that particular type of unemployment, which is not accurate.

3. Answers which showed clear explanation of expansionary fiscal / monetary policy and evaluated why it will and will not solve unemployment with exemplification scored well. Many gave one-sided arguments or did not use economic analysis. These answers are awarded only level 1 marks.

4. Some errors made serious here by confusing the different types of unemployment. Indiscriminate use of ‘productivity’. When we say there is a fall in productivity it means for the same amount of input there is less output. Many a times students meant fall in production in the economy and used the term ‘productivity’ instead. Similarly, the term ‘productive capacity was Some used loosely’. students associated a decrease in unemployment with an increase in productive capacity.

5. Some students tried to use PPC to illustrate this, but did not clearly explain the significance of producing on PPC or within PPC. While there might be a loss of human capital, it will most definitely not shift the LRAS to the left. That only happens when factors of production are destroyed. Loss in human capital in this case only means that the potential growth rate is slower. Don’t focus on political / social / psychological aspects. Have to link back to the economic costs incurred. Many students point out the loss in tax revenue but fail to elaborate on implications.




Macroeconomic Policy to High Unemployment

No need to define unN, done in part 9().

Thesis Creating more jobs will help to improve unemployment situation

Creating more jobs can be done with expansionary demand management policies to stimulate the economy. Fiscal and monetary policies are demand management tools.

Explain using expansionary Fiscal / monetary policy. Fiscal policy is defined government spending as the use of and/or taxation to influence the level of economic activity through the aggregate demand. This has been adopted by various governments the world over during periods of recession and high unemployment. This policy works by increasing government spending as illustrated by the Singapore government’s 2009 budget of S$20.5 billion and the US$800 billion fiscal stimulus in the USA in 2008. 


As government spending is a component of aggregate expenditure (AE), this increases the level of AE and leads to an unplanned decrease in stocks. As firms increase production to increase their stock levels back to desired levels, they hire more workers (as well as other factors of production), employment and hence national income increases. Through the multiplier effect, the higher income induces an increase in consumption. This leads firms to hire more workers again to meet the rising demand for goods and services and national income rises a second round. This second round increase in national income induces another round of consumption, leading to a third round increase in national income. With each successive round of increase in income, the amount of leakages, in terms of savings, taxes and import expenditure, also rises. This process will continue until the leakages have risen by the same amount as the initial increase in investment/autonomous exports, by which time, national income would consumption/net have increased by a multiple and employment would also have risen significantly.
(Sketch your own diagram as na exercise, and make reference to it)


Anti-thesis 1- Creating more jobs will not help to improve unemployment

If prevalent unemployment is due to structural unemployment, creating jobs will not work to reduce it as the cause of the unemployment is that the unemployed do not possess the required skills. Supply-side policies like providing re-skilling to ensure the unemployed now possess skills which match the requirements of the economy.


Anti-thesis 2- Creating more jobs may even worsen some types of unemployment

Frictional unemployment may be worsened as there are more jobs available now, implying that it will take a longer time to pick out jobs which are suitable.
(Note: This is assuming jobs created do not match the skills possessed by the unemployed. This is a valid assumption as government will not encourage job creation in areas where the economy has already lost comparative advantage.)


Anti-thesis 3 – Other solutions?

Instead of creating jobs, government can reduce the destruction of jobs by lowering the cost of production for firms when the economy is suffering from a recession. During a downswing, workers are retrenched as stocks pile up with the fall in aggregate demand. With the cut in cost of production, firms might be able to avoid retrenching workers to stay profitable.


Evaluation (side with Thesis)
Hence if cyclical unemployment is prevalent, where there is a deficiency in demand leading to the lack of jobs available, creating more jobs through the use of expansionary demand management tools can help the situation. However, we must also note that jobs created do not necessarily mean that they will be taken up.

New jobs created may require skills not possessed by the unemployed. These jobs may instead be filled up by foreign workers. Immediately, unemployed may not be able to. sieve through and find employment. (also accepted can help seasonal unemployment if jobs created helps to diversify the economy)


Evaluation (side with Anti-thesis)
This is assuming jobs created do not match the skills possessed by the unemployed. This is a valid assumption as government will not encourage job creation in areas where the economy has already lost comparative advantage.

In summary, whether unemployment can be solved depends on whether there are jobs available hence the government role is definitely to ensure that there is no demand deficiency and sufficient jobs are created for the workforce. However, with increased competition from other countries there is a constant restructuring of the economy and even as jobs are created, the skills required are very different. Hence there is also a need for supply-side policies to ensure the skills of the workforce is up-to-date.




JC Economics Tutor’s Comments:
1. Creation of jobs is not linked with the policies of the government. Hence they see FP / MP as alternative policies instead. 2. Lacking in economic analysis. Did not draw diagrams or if diagrams are present, did not make reference to it.

2. Although it is heartening to see that students are making the effort to exemplify, the problem is all the examples given are in Singapore context. It is like students are answering Singapore. a question on This is a problem especially when students write “when there is cyclical unemployment the SG governments can cut employers” CPF contribution… without even stating that this is an example of what Singapore government can do. Since the question is general, does that mean governments in all countries have this option?

3. Surprisingly, quite a number of candidates did not link measures for reducing structural unemployment to supply-side policies.

4. Many should expect at least 19 out of 25m for this relatively simple essay question. More on this key point in our Econs revision intensive class.