JC Economics Essay Series #37 – Unemployment, Demand & Supply Side Policies

JC Econs Unemployment, Demand & Supply Side Policies Essay Model Answers 

As with all economies in Association of Southeast Asian Nations (ASEAN) member state and beyond, one of Thailand’s major economic objectives is to achieve achieve full employment (or low unemployment, unN), about 4-6%. To achieve this goal, the Thai gov can choose to reduce or eliminate Demand Deficient unN, aka Cyclical unN, structural , frictional, or seasonal unN using demand side and supply side policies.


In Thailand, the pace of recovery from the the shock of COVID second wave has caused the economy to contract by -2.6 % in Q1 of 2021, leading to jobless recovery. There is barely enough to absorb the monthly growth in the labour force and not enough job creation to offset the job losses. Weak demand, rather than supply side troubles, is the primary cause of continual high unemployment.
Source: World Bank and various, 2021

(a) Explain 3 main types of unemployment. [10]
(b) Discuss the relative effectiveness of demand-side policies (DSP) and supply side-side (SSP) in tackling jobless recovery of the economy. [15]


JC Economics – Structural, Cyclical & Frictional Unemployment

This question requires students to be able to identify the types of unemployment extract Students would have to identify 3 forms of unemployment stated explain the cause of such unemployment.

Define Unemployment: Unemployment refers to the number of people of working age who are willing and able o work, but currently not engaged in jobs.

As stated in the pre-amble, the causes of unemployment is caused possibly by slow growth accompanied with higher increase in potential output, cyclical unemployment, possibly structural employment and perhaps frictional unemployment. The recession has resulted in cyclical unemployment. There is falling aggregate demand as a result of the fall in consumption, investment and net exports.

One of the contributing factors is that aggregate demand is growing much slower than aggregate supply. The slower growth is probably due to weak business expectations and sentiments of the economy.

Another contributing factor to the unemployment is possibly structural unemployment. Structural unemployment arises when there is a mismatch between the jobs offered by employers and the skills, experience, education and geographical location of the job seekers.

Finally, a possible contributor to the high unemployment rate could be due to frictional unemployment. Frictional unemployment occurs as people seek to change jobs, either voluntarily or not.

While there are possible other sources of unemployment such as seasonal unemployment, the slow recovery, structural unemployment and frictional unemployment are likely to be the biggest cause of unemployment in this case. As stated in the extract, the slow recovery coupled with the increase in new workers are more likely to be the reasons for the higher unemployment compared to structural unemployment.


Marking Rubrics:
Level 3: Well-developed explanation of3 forms of UNN Including AS increase greater than AD increase, 1 supply side related UNN and 1 other form of UNN as mentioned.
Level 2: Explained types of UNN without focus on those mentioned in the extract, OR undeveloped explanation of types of UNN mentioned.
Level 1: Answers are mostly irrelevant. Only few valid points made incidentally with little economic analysis.

(Read another essay on unemployment)

Econs Tuition teacher’s comments:
1. If the question did not specify 3 types, the 2 of cyclical and structural unN will suffice. This was a fairly easy question with little twist. It is mostly about the more traditional forms of unemployment as well as recognizing the situation as stated in the preamble.

However, many JC Econs students chose to regurgitate the standards forms of unemployment without regard to the situation presented in the preamble. As such, majority students were limited to a level 2 response. Some of the students managed to hit a level 3 without recognizing that the increase unemployment is possibly due to a difference in growth of AS and AD. The responses given were able to apply the context of unemployment in the Thailand using well explained answers and good use of examples.

2. If you know Thailand, tourism revenue is a significant contributor to her GDP. So can actually choose seasonal instead of frictional unN, as former affects tourism more than latter.

Additional Economics Examiner’s Comments:

3. For the majority of the students, responses were limited to the regurgitation of the lecture notes with no relevant examples. When explaining cyclical unemployment, a number of students failed to use the AD/AS analysis to showcase this form of unemployment. For those that did, some mistook the axis for Real National Income to be that of employment.

4. Some students were confused between cyclical and structural unemployment. Some responses also showed confusion between structural and frictional unemployment. A number of students tried to use. examples to showcase a certain form of unemployment as well, mainly frictional and structural.

5. A small number of students gave a weak response to this question, listing only the types of unemployment without elaboration.



JC Economics – Demand Side Policy & Supply Side Policy

Jobless recovery could be a result of aggregate supply growing as fast or faster than aggregate demand (AD). When the increase in aggregate supply (AS) is not matched by AD, potential output is growing than actual output, causing employment to worsen despite growth. In addition, jobless recovery could also be a rise in output in areas that are not labour dependant, hence absorbing less labour into the workforce. This maybe that the workers are not suitable for the more capital intensive industries, especially so with industries using a high level of technology. The slow recovery as well as existing structural employment would require a combination of policies in order to solve the issue. While demand-side policies (DSP) could help increase the recovery, it has to be accompanied by supply-side policies (SSP) in order to curb existing structural unemployment as well.


DSP can be done either through an expansionary fiscal policy or monetary policy. A possible DSP that can be used in this case is expansionary monetary policy (EMP). As mentioned, one of the main issues resulting in the increasing unemployment is the slow recovery of the economy. To further improve the recovery efforts, government could adopt the expansionary monetary policy to increase recovery efforts. An EMP could involve the government lowering the interest rates in the country by increasing money supply. The lower interest rate can possibly increase investment and consumption as the cost of borrowing is now cheaper. With greater investments by firms and consumption by individuals, there would be an increase in aggregate demand of the economy. As seen in the diagram, this would result in AD shifting more to the right from ADO to AD1. This would hence increase output from YO to Y1, which would be nearer the full employment output. The increase in output would mean that firms run down their stock and would need to increase production, resulting in firms increasing employment so as to be able produce greater output. This spur in AD could be sufficient to increase the rate of recovery, matching and even exceeding the increase in new employees in the market, solving the unemployment issue.
(Sketch AD-AS diagram with AD shifting.)


However, one important factor that may impede investments and consumption is the future expectation of the economy. Given the amount of uncertainty in the time of crisis, the low interest rates may not attract investments nor increase consumption substantially. This pessimism about the future would hence reduce the effectiveness of the policy to correct the unemployment problem.


Yet, even if the DSP can help to improve the recovery efforts by creating jobs, the structure of the economy may still hinder the uptake of labour, resulting in unemployment. Hence, supply side policies could be used to help better match skill levels to job requirement. A possible supply side policy that be used in this case could be job training for the unemployed. One of the issues existing within the economy is that of structural unemployment. The government could tie in which schools and educational institutes to create courses that can train the unemployed or the lowly skilled with skills relevant to the changing economy. This training would hence help in the reduction of skills mismatch between the employers and employees, reducing the amount structural unemployment within the economy. With skills matching the requirement of the jobs, increase in output would naturally increase the demand of labour, increasing employment and easing the unemployment issue. However, job training can be costly if without government subsidies. In a economy which uses a high level of technology, training of labour could be exorbitant due to the highly specialized skills needed in the industries. Even if government subsidises, job training may incur an opportunity cost to the trainees as they would not be able to earn an income during the training. For those who have been unemployed for a period of time, this could incur a greater burden on them and their family as it would result a loss in income. Furthermore, the training may take a while to completed, which may increase the reluctance of the unemployed to undertake training.


DSP such as EMP would be effective than supply side policies in dealing with the unemployment problem as it deals directly with the slow recovery of the economy. If the economy can improve at the higher rate, it would be able to create employment at a rate faster than the increase in employees. In fact, supply side policies such as retraining may aggravate the issue since if economic recovery is slow, retraining could potentially increase the aggregate supply, causing an even higher rate of unemployment. Through training, the labour productivity of the employees could potentially increase, shifting AS from ASO to AS1. This could increase potential output from YF1 to YF2, aggravating the unemployment issue if there is no substantial rise in AD. Hence, in this case, DSP is better suited compared to SSP.
(Sketch AD-AS diagram with AS shifting.)


On the other hand, demand side policies would not be able to curb the structural unemployment prevalent in the economy. Even by increasing the aggregate demand so as to create jobs, the jobs available may not be suited to the employees. This is especially so if the economy in question is engaged in industries using a high level of technology. While there is a demand for jobs, the lack of skills in the labour market means that the firms would not be able to employ the existing labour. In this case, supply side policies, by retraining workers with skills more relevant to the economy would be able to realign the skills of the workers to the needs of the economy, solving the structural unemployment issues. With the improve in quality of labour, recovery efforts would hence result in greater uptake of labour.


Here, due to the existing problems of slow recovery and structural unemployment, a combination of policies would be preferred. Perhaps, rather than using EMP, fiscal policy through the building of infrastructure by the government can increase the aggregate demand sufficiently and reduce some form of structural unemployment through the increase in employment of the lowly skilled workers. That being said, in order for these workers to remain relevant, they would still need to undergo training so as to equip themselves with the skills needed in the ever changing economy.



Econs Tuition teacher’s Remarks:
1. Most students did not get 20 or more marks out of 25m, cos they didn’t highlight impact of weaker S$ on our imports. More on this key point in our Econs revision lessons.)

2. We are not expected to be familiar with the Thai economy, so application is less demanding.

3. Students are required to examine the major forms of unemployment mentioned in part (a) and compare how demand-side policies and supply-side policies can curb the problems. Students should evaluate the policies options and come to a conclusion which is likely to curb this form of unemployment.